Gettysburg Real Estate – State of the Market

On February 25, 2011, in Uncategorized, by David Monsour

Gettysburg Real Estate State of the Market Q1, 2011.  I’m not going to handle this like a presidential state of the union because I simply don’t have enough time to wait through all the unnecessary clapping but I would like to explain where we are now and where we are going.  The current market is being propped up by extremely low interest rates.  Rates have trended from the low 4’s to high 4’s and into the low 5’s at this point.  Many believe that the FED has realized that buying bonds to keep the rates in the low 4’s isn’t worth the expense to keep the housing market slightly more active.  They have instead decided that rates at or under about 5.5% will not have any negative effects on the real estate market and that the expense to provide these rates makes more monetary sense for the US government.  However if rates start to head for 6% the government is likely to take any steps necessary regardless of expense to resuscitate housing. 

Why is the government printing money to buy bonds?  Because if rates begin to climb as inflation begins to bear it’s ugly face home values are going to take a severe beating.  It is recognized as a general rule of thumb that for every 1% increase in interest rates over 4%, a homes value has to decrease by 10% to keep the monthly mortgage payment the same.  Think about what happens if we go from 4% to 7%.  It would require a 30% drop in home prices to keep payments the same. 

Think about losing another 30% of your homes value on top of the 20-40% that has already been lost since the late 2005 price peak.  Eventually the FED will lose its ability to control rates and inflation will take over.  At that point it will beyond the control of US government.  Don’t forget – Printing money makes the value of the dollar decrease because there is more money in circulation (economics 101).  Rates will likely rise slightly this year but on average will still be excellent compared to rates over the past 50 years.

Right now real estate is heavily influenced by interest rates.  It can be expected that the 2011 housing market will be a bit sluggish but will not see any huge declines.  With rates being low and bargain hunters still in the market 2011 is a good year to sell before rates start to climb and home values see a further decline in value.

 

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