Why Europe's Turmoil Could Hurt Your Home's Value

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Greek Speak
A demonstrator raises his hand and shows the word 'No' in Greek as a Greek flag waves at a rally organized by supporters of the 'No' vote last week in Athens, Greece.
For many Americans, the ongoing turmoil in Europe seemingly has little or no effect on their daily lives. Yet as Greece has fought both internally and with its European neighbors for months about how to deal with its increasingly burdensome debt obligations, the economic fallout from what's going on across the Atlantic has actually started to show visible effects within the U.S., and depending on what happens next, American homeowners could be the next to feel the pinch of what's happening in Europe. Let's take a closer look at why Europe's big challenges could hurt the value of your home.

Why Europe's Markets Matter to You

You might think that unless you're planning on traveling to Europe, what happens overseas doesn't have a big impact on your wallet. Because of the increasingly global economy, however, European troubles do have an effect both on U.S. companies and on the average American. Investors in U.S. multinational corporations, for instance, have seen their earnings from abroad take a hit, as the euro and other major foreign currencies have fallen against the U.S. dollar. Because the money that American companies make in foreign countries is worth less in U.S. dollars when America's currency is strong, they haven't enjoyed as much profit growth as they would if the dollar were stable. Greece's back-and-forth battling about whether to remain a part of the Eurozone or to readopt its old local currency has some commentators questioning whether the euro will be able to survive in the long run, as the precedent of allowing countries to leave the monetary union could destabilize global trust in the currency.

Even if you're not an investor, though, Europe's markets are relevant to your finances. For more than a year now, as economic conditions worsened on the Continent, bond yields in Europe have plunged, with countries including Switzerland, Germany, and France having actually had negative interest rates on some of their bonds -- meaning that institutions were willing to pay the government for the privilege of holding on to their cash. Now, though, those yields have abruptly reversed direction. In Germany, bond yields soared by nearly a full percentage point between April and June, a lightning-fast response to the belief that the European economy might finally improve.

Because the bond markets are global, lower rates in Europe helped keep U.S. rates low as well. As rates have bounced back, though, mortgage rates in the U.S. have also climbed, and that could pose a long-term threat to the housing recovery.

Why Rates Matter for Housing

The reason rates are so important for the U.S. housing market is that most buyers have to get mortgages in order to afford to buy a home. When interest rates rise, the amount that a bank will lend to a prospective homebuyer goes down, and that in turn could take away one of the underpinnings of the housing market's recent advance.

For example, mortgage rates hit a low around 3 percent at their lowest point a couple of years ago. Now, you'll pay closer to 4 percent on a 30-year mortgage. On a $250,000 loan, that single percentage-point increase raises your monthly payment to $1,194 from $1,054. That might not sound like much, but if you can only afford that $1,054 payment, then your bank won't let you borrow $250,000. Instead, you'll have to make do with a mortgage loan of around $220,000.

When buyers can't afford to borrow as much, they also can't bid up home prices as quickly. The inability of potential homebuyers to keep up with soaring housing costs was one of the main contributing factors to the housing bust in the mid-2000s, and at least in some markets across the nation, prices are starting to get close to or even surpass their highs from the housing boom.

How to Handle European Uncertainty

The situation in Europe is volatile, with new information constantly changing the prognosis for the eurozone's future. What Americans have to realize, though, is that they can't afford simply to ignore what's happening in Europe. If financial markets abroad start to show structural cracks, the impact could easily ripple into the U.S. and affect seemingly unrelated markets. Therefore, you should make sure that you're comfortable with your housing exposure right now to be sure you can weather whatever storm might come in the future.

Motley Fool contributor Dan Caplinger looks forward to cheap euros for his European vacation this year. You can follow him on Twitter @DanCaplinger or on Google Plus. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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