Market value is the most critical factor in any avenue of real estate; everything is tied to market value and market values are always fluctuating. Understanding real estate equates to understanding how to determine market value, essentially understand how to conduct your own appraisal. The irony is that appraisal is not widely known even among industry professionals. Appraisal is not difficult, it is not complex and the crucial element to all things in real estate. Whether you are acquiring a home, refinancing, reducing your property taxes, investing, etc. everything correlates to market value and the funny thing is that real estate market values are always changing. Real Estate values are constantly changing so the key is: understanding appraisal and how market values are determined. When you know appraisal and how market values are calculated you will have the tools needed to work with your banks 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 determine your market value 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.
Historically, there is an inverse relationship between real estate market values and the interest rates. When housing market values are up normally the interest rates are low and inversely when the real estate market is down the interest rates are up. In the 1990s the housing market was pretty low and the interest rates were in the double digits. I can recall 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 go up. 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.
Real Estate markets like the one today, where the real estate prices are decreasing and the mortgage rates are low as a result of the Fed attempting to stimulate the economy, inflation rises. The economy operates on a balance and when that balance is disturbed it creates inflation. The banks may be healthier if they could get more in interest on the funds loaned out. This is one of the causes of the mortgage and housing crisis. Increasing interest rates may stimulate spending indirectly by offering the banks more on their money, banks will be more inclined to loan out money.
Real Estate prices and interest rates off set each other, so when they are both down it appears to be a good real estate market, yet we are seeing the results of it with all of the bank bankruptcies and shut downs. Something has to give and right now the banks are suffering and as a result the consumers are suffering also because not as much money is being loaned out for continual movement of real estate.
An inverse relationship with real estate values and interest rates begs the question: Is it better to buy 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 purchase 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 large principal balance. However, if you purchase a property in the midst of a low real estate market with a high interest 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 note and the next highest cost normally is your assessment. The great news is that a low housing market allows for a lower assessment which means lower property taxes. Whether you have purchased in a high housing market or a low one you can make sure 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 reducing your property taxes. Education on how to determine market value is the key to every door pertaining to your residence including reducing 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.
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