Rising Home Prices: How They Can Help VA Borrowers

For the past year or so home prices have been on the rise, good news for VA borrowers.

According to the National Association of Realtors home prices in the first quarter were 11.3 percent higher than a year ago. Among the top 150 major metro areas, home values increased in 133, but fell in 17.

So why are such numbers important for the VA loan program?

The Veterans Administration does not actually put up the cash necessary to make mortgages. Instead, it's an insurance program. With backing from the VA vets and military households are able to borrow mortgage money with nothing down because lenders know that the strong guarantees from the VA substantially limit their risk.

The catch is that the VA is like any mortgage insurance program. It faces claims and losses, especially when home values decline. For this reason rising home values tend to reduce the size of the claims faced by the VA, meaning that with growing home values the program is unlikely to require higher fees and charges – or that the VA mortgage program needs to be revised in a way that would make it more restrictive.

Rising home values increase real estate equity, the value of a home after subtracting mortgage debt.

"A strong rise in home values is contributing to housing wealth recovery, which has risen by $1.4 trillion in the past year and looks to top that increase this year," said NAR's chief economist Lawrence Yun. "The extra consumer spending arising from growth in housing wealth is expected to be $70 billion to $110 billion this year."

Rising home values are important for millions of Americans because the real estate marketplace has not yet returned to the peak prices seen in April 2007. The result is that a large number of homes remained financially underwater – but this number declines as home values generally rise.

It can be argued that steeper home values reduce affordability thus making it more difficult for first-time buyers to enter the marketplace. However, at least at this time we have a combination of prices and mortgage interest rates which have led to a very high level of affordability. According to the National Association of Home Builders, "73.7 percent of new and existing homes sold between the beginning of January and end of March were affordable to families earning the U.S. median income of $64,400."

Not to be overlooked is that the thought that prices also do something else: They make the market more attractive for homebuyers in the sense that rising prices suggest increasing demand.

We don't know what will happen in the future or in any particular market, but the view here, for what it's worth, is that it would be surprising if home prices continued to rise at the torrid pace seen during the past year. A more-likely scenario would be slower growth as the housing sector continues to shed distressed properties which have accumulated during the past few years. Of course, for the VA loan program, rising prices are always good news.