TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/59481
FEATURE through the market, appraisers will continue to overemphasize these properties and short sales in home values." Adelino, Schoar, and Severino suggested in their economic study that credit does have an impact on value in at least two ways. "First, better access to credit increases demand for houses, since more people can now bid on properties and, as a result, we see an increase in the price of the transactions," they wrote, adding, "Borrowers who have easier access to finance bargain "Homeowners have a strong incentive to protect their prop- erty values, both by limiting the exposure of their homes to potentially noxious adjacent uses—the traditional justification for zoning—and by preventing nearby new construction that could, in effect, compete with their own homes and drive down prices when they look to sell in the future," Paciorek said in his study. "The effect of regulation on price levels can thus be seen as a transfer to current homeowners from downplayed the impact of rates, except as a tradeoff for other factors. "I do think that the low interest rates are integral to a re- covery in our real estate market," she said. "Homeownership is in- tegral to a strong economy. The lower interest rates are helpful, as the requirements for mortgage approval are more stringent than they were. People are required to have more skin in the game now from the onset. Many could not afford the monthly payments if the rates were higher." "First, better access to credit increases demand for houses, since more people can now bid on properties and, as a result, we see an increase in the price of the transactions." less hard for a reduction in prop- erty prices relative to borrowers who struggle to find financing. Importantly, in either of these channels a change in access to finance is driving the change in borrower behavior and conse- quently house prices." Regulatory Pluses and Minuses P aciorek's more traditional view suggests prices are driven not by the availability of financing, but by constraints on develop- ment—both geographic in the form of natural boundaries such as lakes, rivers, mountains, or valleys as well as regulatory. "Regulation of all kinds causes delays and adds tens of thou- sands of dollars to the cost of a house on the margin," he said. Those delays leave little wiggle room for negotiation in the home-sale transaction. At the same time, he sug- gested, there are some benefits to housing regulation. 28 | THE M REPORT prospective future homebuyers, who face higher prices, and some current landowners, who may be prevented from fully develop- ing their land and selling at the market price." Interest Rates and 'Skin in the Game' A delino, Schoar, and Severino measured prices and interest rates by studying the trend in annual levels of the conforming loan limit (CLL) as an instru- ment for easier access to finance and lower cost of credit. "A home that becomes eligible for easier access to credit due to an increase in the CLL has on average a 1.1 dollar higher value per square foot compared to a similar-quality house that is just above the threshold that allows it to be financed with a conform- ing loan at 80 percent loan to value," they concluded. In reaction to their study, Beth Daly of RE/MAX Preferred in Fort Lauderdale, Florida, Becky Walzak, president and CEO of Walzak Consulting, which assists mortgage companies with operational and enterprise risk management in the production and servicing of mortgage loans, said, "Economists have long held that supply and demand drive housing prices far more than interest rates. Traditionally when interest rates drop, housing becomes more affordable and demand becomes higher. As interest rates get higher, housing is less affordable. The relationships between housing prices and interest rates we are seeing today are an anomaly due to the overheated housing market of the 2000s and the resulting crash of prices. The fact that the economy is just starting to recover and therefore the Fed is artificially keeping interest rates low is not typically associated with low housing prices. The low prices are traditionally thought of as a consequence of the sluggish economy and the excess inventory of housing due to foreclosures." Lower rates, particularly those for conforming loans, may be not be as helpful for buyers as it seems and indeed may help sellers more, Adelino, Schoar, and Severino suggested. The "interest rate subsidy granted by the GSEs and, ultimately, the taxpayer, does not fully benefit the buyers of homes," they wrote, "and instead partially accrues to the sellers of homes in the form of higher house prices."