What happened to the Jacksonville Real Estate Maket?

So what's causing the drop in home prices in Jacksonville? That's an easy one. With over 16 months of inventory as of August 2008 there are still too many homes on the market. As with anything else it is an issue of supply vs demand. An increase in supply drives prices down while and increase in demand drives prices up. Simple economics.

So what caused the increase in supply? This may be up for debate but here's my take on it. Adjustable rate subprime mortgages. During the boom years practically anyone could get a mortgage. If the borrower did not have the income to qualify they were offered the SISA (Stated Income Stated Asset) loan. Then they could state whatever income was needed to qualify without any documentation. Many of those borrowers opted for adjustable rate mortgages because they came with a lower rate. Tack on a pre-payment penalty period and they got another 1/8 point reduction. In some cases the pre-payment penalty period exceeded the fixed period of the loan. That's where the trouble started. When rates started to climb borrowers could not refinance without paying a hefty penalty which was usually equal to six months of mortgage interest. When they could no longer afford the higher payments the home would go into foreclosure or would be sold as a short sale. Adding those forced sales to the normal sale activity flooded the market with homes priced below market value. Higher mortgage rates reduced the pool of qualified buyers to buy them. There you have it.

So why did mortgage rates go up? When people hear that the Federal Reserve has cut short-term rates, they expect long-term mortgage rates to move in the same, downward direction. But it's a stubborn fact that when Fed rate cuts are deemed inflationary, long-term mortgage rates go up. Bond yields rise to attract investors and mortgage rates follow. And that's what has been happening in the past few months. Heres why. When the Fed cuts rates, the economy typically is the beneficiary. This means businesses will do better as more sales are made. Manufacturers, service providers and retailers will then be more inclined to raise prices in response to an increased demand. Lets say the Consumer Price Index (CPI) indicated that overall prices rose 0.4 percent last month. That translates into an annual inflation rate of almost 5 percent. That rise in inflation reduces the actual return on a fixed interest rate investment like bonds, so with 5% inflation, that 6.74% mortgage note returns only 1.74% "real" interest. By that measure, a rate of 6.74 percent for a 30-year mortgage seems like a bargain.

For detailed information about the Jacksonville real Estate Market visit my web site and click Jacksonville Real Estate Market trends.

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