Everything in real estate starts with market value and market values are always fluctuating. They key factor to doing anything in real estate is understanding how to determine market value, basically know how to conduct your own appraisal. The irony is that appraisal is not generally understood even among industry professionals. I have close friends and colleagues that are experienced realtors and often they dont understand the critical factors to establishing the value of a home. Appraisal is not hard, it is not complex and it is the key to all things in real estate whether you are buying a house, refinancing, lowering 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: knowing appraisal and how market values are established. When you understand appraisal and how market values are determined you will have the understanding necessary 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 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 homes and know how those appraisals relate to lowering your property taxes.
There is an inverse relationship between real estate market values and the interest rates. When housing values are high normally the interest rates are low as opposed to when the real estate market is down the interest rates are high. In the 1990s the real estate market was down and the interest rates were in the double digits. I can recall when 11% was a good mortgage interest rate.
The real estate values started climbing in 2001 and the interest rates decreased as the housing market continued to go up. What the banks make in principal they off set with lowering the interest rates and inversely when the market values are lower this is off set by increasing interest rates. The bank makes their money one way or another and this helps control inflation.
Real Estate markets like the one today, where the real estate values are decreasing and the interest rates are low as a result of the Fed attempting to stimulate the economy, inflation rises. Our 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 money loaned out. This is one of the causes of the mortgage and housing crisis. Increasing interest rates may stimulate spending indirectly by giving the lending institutions more on their money, lending institutions 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 consequently 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 mortgage rates or a low real estate market with high mortgage 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 purchase a home during 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 mortgage 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 home 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 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 determine market value is the key to every door pertaining to your home 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.
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