I had a discussion with someone yesterday to explain my theory on why home values are falsely inflated by zero-down loans. A few decades ago, most homeowners were putting 20% down in order to obtain a loan. Somewhere in the 90s, mortgage brokers and buyers started doing a lot of 100% loans, which became even more popular as home prices increased and interest rates became more affordable. Currently, most loans that I see from non-investment borrowers are completely financed. Closing costs and some repairs are often rolled into these loans.
If you think about it, if you buy a house that is valued at $200k and then roll in $15k of costs, is this home really worth $215k? That's what the city of Austin and other taxing authorities say, especially when the lender and appraiser agree. Now that buyers are financing everything into their loan, appraisers must value the home at the slightly higher price to adjust. In theory, if the home was not work $215k, it could not appraise. In the real world, most appraisers and lenders hate to be the bearer of bad news and tell a borrower that they need to pay $15k of unexpected costs.
Are the lenders and appraisers to blame or is the agents and buyers? I can't point to any one group, but we've seen property tax values skyrocket in our local areas. Besides shrinking inventory, I believe part of it is due to these 100% loan products. Zero down loans aren't necessarily a bad thing, but it's going to take time to see their full effect on the economy and housing markets. If you remember, everyone was in love with Ajustable Rate Mortgages (ARMs) between 2002-2005, but now foreclosures are on the rise because the interest rates have started increasing every 6 months to year for these home purchasers.
Again, only time can really show the zero-down loan's long-term effect.
Dee Copeland, Investment Specialist
AustinHomeNews.com, Team Dee Residential
eRealtyAlliance Commercial Real Estate
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