How Real Estate Drives the Interest Only Mortgage Market

The real estate market and the mortgage market are greatfriends; they generally are seen hand in hand, wherever they may go! One fuels the other's ambitions. Never a truer statement has been made and they(the real estate and the mortgage market) seem to feed off each other, as theyboth have continued to grow over these last few years.

If apotential buyer has the greater possibility of securing a mortgage, the greaterthe opportunity to sell a home or buy a home becomes; Whenever the opportunities increase for thebuying and selling of real estate, then the prices for real estateincrease. Can you clearly see therelationship now and how one drives the other? As the mortgage market has expanded, and the possibilities broadened, sohave the prices of homes, the new home construction market, as well as thecommercial development of real estate.

Thepotential for problems exist when this all happens too quickly, or when thegrowth in one area exceeds the average growth rate of other areas. This is the case with the real estate marketand the interest only mortgage. Much ofthe growth in the mortgage market has been with interest only loans. Many analysts put the interest only segmentof the mortgage market at almost 23%. That's a huge hunk of the entire mortgage market and this segment hasbeen responsible for most of the overall growth. It would also seem that it hasplayed a tremendous role in fueling real estate prices. Is this a rollercoaster ride, waiting for thedrop, if so, let's hope we're all buckled in!

Let's takea moment to look at the four areas that contribute to this continued upwardgrowth, and their impact on real estate.

The priceof existing homes on the market is a pretty easy one to figure out; if you haveyour home for sale, quite naturally it will bring a comparable price to theother homes in your area. How does thisserve to drive real estate prices? Thisconcept works with a Domino effect, in that when one home increases in value,it also affects the homes around it driving the price, further upward. 

The newhome construction market is heavily reliant on building material prices todetermine the building cost and the contractor's profitability. If building construction is on the increasequite naturally, the prices of building materials are on the increase; when youhave an optimistic and growing economy, you will have increases in buildingmaterial cost.

The otherbig drive in the real estate market comes from the development of commercialproperty. In resort areas, particularlythe development of real estate property for commercial purposes tends toquickly affect the surrounding areas real estate prices. Many of today's commercial mortgages havereached loan limits well over $1 million; in fact, some of the residentialmortgage loans in certain resort areas are approaching the have themillion-dollar mark.

Now, whenyou combine all of these contribute factors, a mortgage market that isextremely optimistic with its lending capital, you have the makings of a marketsegment, with the potential for a bubble effect. What happens in a bubble effect economy? The bubble continues to grow until itbursts. This is what many analysts andeconomists fear: that too many consumers are betting the farm on a continual,optimistic spurt of growth. What couldcause our booming economy to rupture? Inreality, many conditions can contribute and provide the needed catalyst. 

Well, what ifthere is a continual increase in pricing but there is generally a continual downwardspiraling of the ride we're on? Well, ifthere should be a tremendous downward turn in the investment market, if thereis a continuing loss of jobs in this country, or if there are any naturaloccurrences that lead to disasters that are beyond governmental or companycontrol, you could see a possibility for disaster. Does that mean it will happen? No. Itjust means that the potential exists. But in the defense of the housing and real estate market, if you'regoing to be risky, that's the place to be. It's one of the safest risky businesses that exist.