“…let’s assume a loan amount today of $100,000 with a 30-year fixed-rate residential loan at 5 percent. Nationwide at the time of this writing, the average 30-year rate was 4.85 percent per Freddie Mac. Fannie Mae forecasts an average rate in all of 2009 of 5.13 percent. So the 5 percent is a reasonable assumption.

The following table shows the monthly payment for each loan amount and interest rate. A buyer today at 5 percent interest borrowing $100,000 has a monthly principle and interest payment of $536.82. If prices decline 5 percent (and the loan amount does also) and interest rates rise just ½ of 1 percent, then the monthly payment remains the same ($539.40).

So if rates go up just 1 percent to 6 percent per year, then prices must drop at least 10 percent for that same buyer to qualify for the same monthly payment. A 1.5 percent increase in rates to 6.5 percent requires a 15 percent price decline, and a 2 percent increase necessitates a 20 percent price decline to qualify. Note: This 1 percent interest rate change to a 10 percent price change is only true when interest rates are 5 percent as they are today.”

Interest Rates vs. Price Changes

Admittedly, at the same loan-to-value ratio, as prices decline so does the down payment. Since, however, many buyers select the price range of homes they consider buying based on their monthly payment potential, rising rates may force future buyers into less expensive homes and hence properties they find less desirable.

So, if you are waiting to move up or to make that second home investment – don’t wait much longer! Postponing that purchase is going to price you out of the market and you are going to have to settle for something less or just wait for the next recession. Don’t get burned. Thanks to Ted Jones for letting us reprint part of his blog which can be found here.

Home sales stabilizing, but prices still falling

By Alan Zibel
ASSOCIATED PRESS
Wednesday, June 24, 2009

WASHINGTON — Nationwide home sales may have finally hit bottom, new data show, but a host of thorny problems are hindering a recovery.

Sales of previously occupied homes rose by 2.4 percent from April to May — the third monthly increase this year — but the results missed analysts’ expectations.

Home sellers are still competing against a growing number of bargain-priced foreclosures, buyers are paying higher mortgage rates, and new rules for property appraisers are delaying or scuttling many deals.

“We have just been flooded with e-mails, telephone calls on the appraisal problems,” said Lawrence Yun, the Realtors’ chief economist.

…New rules designed to tackle conflicts of interests in the property appraisal process have caused many transactions to fall apart or be delayed.

Responding to widespread complaints about inflated appraisals during the real estate boom, New York Attorney General Andrew Cuomo reached a pact last year with mortgage companies Fannie Mae and Freddie Mac on a new code of conduct for the industry.

Since the rules took effect May 1, real estate agents and mortgage brokers say a number of appraisals are coming in surprisingly low.

The National Association of Realtors is pressing regulators to put an 18-month hold on the code, arguing in a letter Monday to regulators that the code is “hampering the housing market’s recovery.”

Although the new rules are not ideal, appraisers are not to blame for a market in which prices are falling rapidly, said Bill Garber, director of governmental relations at the Appraisal Institute.

He defended the industry, saying, “The appraisers only report what’s going on in the market.”

For anyone unfamiliar with the real estate process: a Home Seller and a Home Buyer negotiate, then agree on a price for a home. The Home Buyer is pre-approved for a loan, from the bank. The home is then inspected. If it passes inspection, the Home Seller and Home Buyer agree to make the deal. The lender requires third party appraisal. Where does that appraisal come from? 

It used to be that loan officers, mortgage brokers, real estate brokers or real estate agents could help select an appraiser. But as of May 1, 2009, a new National Home Valuation Code of Conduct was put into place. The new policy states that any mortgage to be owned or guaranteed by Freddie Mac or Fannie Mae cannot allow those parties (loan officers, mortgage brokers and licensed Realtors) any role in selecting the appraiser.

This agreement, struck back in March 2008 between Freddie Mac/Fannie Mae, the Federal Housing Finance Agency and the Attorney General seems like it may be in the interest of fairness. But the result is that many lenders are now outsourcing to appraisal management agencies. These agencies take part of the appraisal fee, from 30% – 50%. (With these cuts to their fees, experienced appraisers are turning down these agency offered jobs.)  There’s also a “quantity over quality” mentality, as the agencies often impose a 48 hour deadline for the appraisals. These quick appraisals are often done by out-of-area appraisers. 

The result of the “faster, quicker, cheaper” mindset? Less accuracy and less certainty of a home’s value. Further, if there isn’t a comparable sale, an in-area appraiser has a better and surer understanding of intricacies from neighborhood to neighborhood, and street to street.  

What can a Home Seller expect to see, then? Their appraisal may be outrageously incorrect, although there are cases of these appraisals being challenged.