When you talk about the real estate market, especially in the Upper Valley, it's important to remember that local market performance is inextricably linked to mortgage interest rates. Sure, in Hanover and Norwich, maybe Lyme, there are plenty of million dollar plus properties and the buyers of those most times pay cash, but the vast majority of real estate transactions here and all over the country involve a mortgage loan and key to that process is interest rates.

We'll save a more in depth look at the mechanics of mortgage process, discount points, closing costs and so on for a later post. For the purposes of this discussion, we'll talk about the ways that market performance and interest rates work in concert. Probably the most  important market segment is "first time buyers" who can have a double impact on sales. Generally speaking, first time buyers have the most difficult time acquiring a mortgage loan because:

• Many first-timers do not have much cash to use for a down-payment and closing costs, so they have a higher "loan to value ratio". That means they must many times borrow 95% of the property's value rather than the more standard 80%.

• They sometimes have lower credit scores and less time on the job, which causes problems. They can also have a high "debt to income" ratio which lenders do not like to see.
   
• In  markets like the Upper Valley where median prices are over $200K and over $300K in some communities, there are only a few properties that are in an affordable price range.

What this all means is that one point of interest increase can sometimes take these buyers out of the market, because it raises their monthly payment enough to mess up their "housing cost to income" ratio, which should be about 30%. When the first-timers get priced out of the market, it also ripples up. Former first-timers who, in many cases are the sellers of more affordable properties, suddenly lack the pool of buyers that enable them to sell and move up and the cycle moves up the chain until you get to the buyers who are paying cash, who of course, benefit, because the effect of higher interest rates is to drive housing prices down. That's why, when prices are already down from other economic catastrophes, like war, $4.00/gallon fuel, ever-increasing taxes, etc. , the FED invariably lowers rates to keep the market from total collapse.

Next time we'll look at the tie-in when housing prices and interest rates meet the stock market. It may feel like conspiracy theory, but history doesn't lie. Stay tuned!