Albuquerque Housing Market Signals Turn in Favor of Home Equity

By Richard Barrington
Local Lender Columnist
May 28, 2008
Housing starts are often cited as a leading indicator of economic activity. So why should Albuquerque home owners take heart at recent news of declining housing starts in the Albuquerque area? Because fundamentally, it signals the beginning of a shift in economic fundamentals that will help support home values in the long run. Home values affect far more people than just those looking to buy or sell a home. For a much larger group of people -- existing home owners -- shifting home values have a direct impact on their net worth and ability to obtain a home equity loan or home equity line of credit (HELOC). This is one reason why the health of the housing market is considered so important to the broader economy.

Housing Fundamentals and Home Equity Values

For many people, their home is their largest single purchase. Therefore, when housing values decline as they have been across the country over the past year or so, it can significantly decrease the net worth of home owners. This has an immediate impact on the economy because it reduces access to credit.

Home equity is the difference between a home's value and the remaining mortgage balance. Home equity is an important source of collateral for home equity loans and HELOCs, forms of credit which in turn pump large amounts of money back into the economy. So when home values decline, home equity declines. In turn, access to home equity loans and HELOCs also decreases, and therefore spending from those loans dries up, hurting the local economy. This can become a vicious cycle if it results in further weakening in home values.

Albuquerque Housing Starts

In Albuquerque, one result of declining home prices is that housing starts have fallen off. In the long run though, this may bode well for property values. New housing permits for the Albuquerque metro area in February, 2008 were down 20% from the same month a year earlier. Year-over-year comparisons help eliminate any seasonal differences in monthly figures. In other words, this 20% decline represents a significant drop in new home construction.

While this is a sign of current weakness in the housing market, the reason it may be a positive in the long run is that housing is driven by supply and demand. Housing prices have declined because over-building and foreclosures have created an oversupply, while tighter mortgage lending and waning buyer interest have diminished demand is one way to correct the imbalance. Ultimately, this will help firm up prices.

Low Mortgage Interest Rates

Homeowners waiting for a turn in housing prices to increase their home equity values should be ready to act because mortgage interest rates remain at low levels. Ultimately, when the housing market really gathers steam it will create upward pressure on interest rates, so it makes sense to act before then.

Source:
New Mexico Business Weekly

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