Saturday, March 1, 2014

First Saturday as the World Turns

Why have homes lost value?

By Ed Rogers

I had a thought the other day. It came to mind that house prices going up and down made no sense. If it cost you $100,000 to build a house today, and five years from now it cost $150,000 to build the same house; why would your house only be worth $75,000.
    The first answer I could come up with, in my mind, was it had to be the banks. I’ve always believed in the saying, “Follow the money.” In the past, as it is now, market value has little to do with what your house is worth. Before all the crooked dealing throughout the nineties, the cost of labor and material set the bottom line for value. These costs the bank covered by a building loan, which the contractor paid off from selling the house.

    It was a simple way of doing business. Labor plus material, plus what the public was willing to pay, and that was the value of your house. It has never been the public that decided what that value was going to be set at, however. It has always been the bank. A person might want to pay you much more than you think the house is worth, but that person could never get a loan to buy your house at that price.

Then along came the nineties and the rule book was thrown out of the window. Refinancing was a gold mine for the banks. People who had been paying down their loans, even though the interest rate was high, came now to be viewed as new customers by the banks. The banks were getting cheap money from the Fed, so they had everything to gain and nothing to lose. The new customers were a good credit risk—after all, they had been paying a house-note for 10-20 years.
    By the time the refinancing ran its course, cheap money and greed had turned the banks into opium dens. They loaned money for any house at any price. The rule for the market value of a house is what a seller will sell for and what a buyer is willing to pay.
    There is, or at least there was, a firewall that kept everybody somewhat honest. The name of the firewall was the appraiser. The appraiser was the honest broker. He or she could keep the banks from offering too little of a loan or keep the buyer from paying too much. It was the appraiser’s job to find the true market value of the property. Being an appraiser was an honorable job…up until the nineties.
    Once greed from the opium dens took a hold of the mortgage lenders, there was no one who could or would stand in front of that train. If you were an appraiser and you wanted to work—you had better learn to play ball. The banks wanted to move paper like an addict wants a fix. If the bank wanted to loan $200,000 on a $100,000 home, and you were the appraiser, you would come back with a $200,000 appraisal or you would never work for that bank again. Sometimes if the word got out that you were too honest, NO bank would use you.
    Then the drugs ran out, and the world crashed.
    These same appraisers are still doing the bidding of the banks. Only now, the banks don’t want to lend money. That is why the bank now wants that $100,000 home for which you paid $200,000 to be appraised at $75,000, or lower.
    The price of building materials has doubled, and granted the house was never worth $200,000. However, does it not stand to reason that the house would be worth more than $100,000?

The word is that the market is turning around and property values are on the rise. However, houses are being appraised on the value from a year or two back. This means that not only is the cost of materials and labor not a factor, the increased market value has nothing to do with how much your home is worth. Also, as long as the homes are appraised low, the value of your house will not increase.
    Corporations like banks use these valuations for their own internal purposes, and they only loosely relate to the real market price. The banks are still getting cheap money, but there is no upside for them getting involved with a dying middle class.
    The dream of home ownership didn’t die—it was stolen. The money lenders stole it, along with all the good jobs that put a generation through college or offered a job next to their father, brother, or other family member.
    The American dream and the 1% cannot co-exist in the same world. They have taken everything our parents fought so long and hard to accomplish. In the South before the Civil War, there were a few uprisings by the slaves, not unlike the protests of today. The slaves far outnumbered the whites in the South. Had they risen up as one they could have freed themselves. But far too many of them—just like us today—believed that the master would change and their life would get easier.

Those who have power do not give it up. It has to be torn from their hands.
Copyright © 2014 by Ed Rogers

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  1. Thanks, Ed, for your explanation, though troubling, of what determines the value of real estate.

  2. Ed, excellent and easy to follow real-world analysis of the situation. My only concern is your analogy may give an unfairly bad reputation to the operators of opium dens.

  3. You're right Paul. In the opium den it's up front what you are getting for your money.

  4. Speaking of...have you given any thought to how much more corrupt the legal selling of marijuana will become in a very few years, than the illegal selling has become in eight decades? The droves of white-collar criminals who swarm to every new corrupt opportunity in banking, real estate, stocks, prescription pharmaceuticals, and so on, are bound to see legal pot as their next goldmine. They may not have dared to scam pot buyers in the past due to fear of catching a bullet or a baseball bat with their head, but they should be on the move now since they obviously have no fear of our country's alleged "legal" system. With your worldliness on such topics and your years in California, have you thought of checking in with any of your old contacts and writing an article about how the legal changes are affecting the industry?

    1. In a way (perhaps) it doesn't matter. White-collar criminals swarm to anything they can think of, so if it's not legalized marijuana, it'll be something else.
          One difference, of course, might be that the customers for whatever alternative they went into might not be as easy to scam as a pot smoker. Or they might be easier, of course.
          I realize what I've just written is drivel, but I so wanted to participate in this discussion somehow. <smile>

  5. There was a movement to legalize marijuana back in the sixties and seventies. Most of us were against it, because we figured the government would jack up the price. We didn't know the cartels were waiting around the corner. It will take a number of years for the money people to get their hands on the controls. Let us face it, once that happens it won't be any worst than the cartels---maybe a little less shooting. And a new bred of pot growers will move back into the hills.[smile, and have a cookie or a box]