Low Mortgage Rates, New Mexico Fundamentals, Bode Well for Home Equity

By Richard Barrington
Local Lender Columnist
May 20, 2008
Housing prices in most areas of the country have declined over the past year, but homeowners in New Mexico can take heart. Economic fundamentals such as mortgage rates and local income growth suggest more support for the New Mexico housing market in the future.

Home prices don't just affect homeowners who are planning to sell. For many homeowners, home equity represents an important source of financing, for projects from home improvements to college tuition. The amount of home equity available as loan collateral is directly related to housing prices.

Home Equity Components

There are two components of home equity -- home prices and mortgage balances, with home equity being the differential between the two. Until recently, both components seemed to be working against home owners.

First of all, median home prices have declined nationally over the past couple years. Second, mortgage rates rose overall from mid-2003 to mid-2006, making it tougher for some mortgage holders to keep up with payments. This problem was exacerbated by home buyers who selected mortgages with balloon payment features.

With home prices falling and mortgage balances more difficult to pay down, home equity values were squeezed.

New Mexico's Improving Economic Fundamentals

All markets, including real estate, are subject to cyclical downturns, but what determines the long-term health of a particular real estate market is the overall economic environment. Some recent news showed some positive signs for New Mexico's economic fundamentals.

According to the U.S. Department of Commerce's Bureau of Economic Analysis, New Mexico's per capita income rose more quickly than the national average over the past year. While New Mexico's per capita income still trails the national average overall, the higher rate of growth indicates an improving trend.

Income growth supports the local housing market in two ways. In the near term, it means more people can afford to buy a home. Longer term, the existence of better-paying jobs attracts more people to the state. Both mean rising demand for housing over time.

Lower Mortgage Rates Support Market As Well

Meanwhile, mortgage rates have reversed course since the middle of last year, and have been trending downward. Falling mortgage rates is a double bonus for homeowners interested in using home equity. First, lower mortgage rates stimulate housing demand, which creates support for housing prices. Second, mortgage rates influence home equity loan rates, so when mortgage rates fall, home equity loans are likely to become cheaper as well.

The bottom line is that New Mexico's homeowners should not be overly discouraged by recent trends. There may be better opportunities to use home equity in the months ahead.

Sources:

• The Farmington Daily Times
• Freddie Mac

About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.