Everything in real estate starts with market value and market values are always fluctuating. They critical factor to doing anything in real estate is knowing how to determine market value, basically know how to conduct your own appraisal. The irony is that appraisal is not widely understood even among industry experts. I have close friends and colleagues that are experienced realtors and often they dont understand the critical factors to establishing the value of a property. Appraisal is not rocket science, it is not complex and it is the key to all things in real estate whether you are purchasing a residence, refinancing, reducing your property taxes, investing, etc. Everything correlates to the market value and the irony is that real estate market values are always changing. So, understanding appraisal and market values is not just understanding, the value of my home is X. The market is always changing so the key is: understanding appraisal and how market values are established. When you know appraisal and how market values are calculated you will have the knowledge necessary to work with your financial institutions on loans and your Assessor’s Office on property taxes. The California Little Black Book and the National Little Black Book walk you through the appraisal process step-by-step so that you understand how to conduct an appraisal and this is a tool you can use many times. Once you have the tool, the Little Black Book, you can appraise an infinite number of residences and understand how those appraisals relate to lowering your assessment.
When housing values are up normally the interest rates are low and inversely when the real estate market is low the interest rates are high. During the 1990s the real estate market was low and the interest rates were in the double digits. I remember when 11% was a great mortgage interest rate.
When the market values started increasing in 2001 and the interest rates steadily decreased as the real estate market continued to increase. What the banks make in principal they off set with lowering the interest rates and inversely when the real estate values are lower this is off set by increasing interest rates. One way or another, the bank is always making their money and this helps control inflation.
In real estate markets like today, where the real estate prices are decreasing and the mortgage rates are low because the Fed is trying to stimulate the economy in some way, inflation increases. Our economy functions on a balance and when that balance is messed with it creates inflation. The banks would be healthier if they could charge more in interest on the money they are loaning out. This is one of the reasons for the mortgage crisis. Increasing interest rates may actually stimulate spending indirectly by giving the banks more on their money, banks will be more inclined to loan out more money.
Housing values and mortgage interest rates off set each other, so when they are both down it appears to be a good housing market, and with all of the bank bankruptcies and shut downs we are seeing the results. Something has to give and the lending institutions are suffering and as a result the we are suffering also because not as much money is being loaned out for movement of our economy.
An inverse relationship with housing prices and interest rates begs the question: Is it better to purchase in a high real estate market with low interest rates or a low housing market with high interest rates? My personal opinion on this is that if you buy in a high market with low rates theres no where to go from there. Your interest rate is low and so it doesnt make sense to refinance and so you are stuck with that huge principal balance. However, if you buy a residence in the midst of a low housing market with a high mortgage rate then your principal balance is low and you can refinance when the interest rates go down. Your interest rate can change; your principal balance doesnt unless you modify your loan. Generally, speaking though your principal balance is a constant and your interest rate is a variable.
The greatest cost you will have with your property is always your mortgage and the next highest cost normally is your assessment. The good news is that a low real estate market allows for a reduced assessment which means lower property taxes. Whether you have purchased in a high housing market or a low one you can ensure you are paying the least amount possible in property taxes! In almost every state assessments are tied to market values so educating yourself on appraisal and the property tax system will give you the most power in terms of lowering your property taxes. Education on how to establish market value is the key to every door relating to your house including lowering your property taxes (assessment).
About the Author: Valerie Faltas, Property Tax Expert has been involved in all facets of real estate for over ten years including assessments, appraisals, estates and trusts, investing and much more. She is a Certified Property Tax Appraiser, Licensed Residential Appraiser and a member of the International Association of Assessment Officers. As a real estate investor and advisor she is well versed in all aspects of real estate. To contact Valerie Faltas go to her website: www.propertytaxlittleblackbook.com.