Residential Real Estate Sales Industry still valuing properties based on financing terms.

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There was once what could only be considered a heretic from the Univ of Chicago who said financing doesn’t create value. He won the Nobel Prize for this observation. An observation that seems forever lost on the Washington\Wall Str Nexus and American economy in general.

Nowhere was this principal made more clear than in the recent mortgage “situation” that wiped out $12 trillion in home values over 10’s of millions of homeowners. Derivatives, pass through securities a’la CMO’s and other Mortgage Backed Securities, Credit Default Swaps, etc. all illustrate Wall Street’s errant ways.

But Wall Street wasn’t the only industry fueling the belly-flop in values felt primarily by the 99% and the once upon time middle class. Don’t get me wrong, the second great depression wouldn’t have happened if it hadn’t of been for Wall Street, but let’s not forget that the Residential Real Estate Sales Industry played just as important part. And yea, sadly neither industry has changed it’s ways.

I recently had an affiliation with a real estate sales person that was very enlightening. She was utterly and constitutionally incapable of discerning the difference between the price based upon the maximum mortgage amount I could afford at the start of my ownership and the true value of the home. Basically, given the interest rate and other terms of the loan being offered I could qualify for a mortgage loan of a certain size and this loan, when added to my equity portion, was the total price I should be pay for the home.

We went around and around on the “safety” of this method of assigning a value to home. I asked her, “what happens during negotiations if interest rates go up and the same maximum monthly payment that I can afford relates to a lesser mortgage amount? According to you the value of the home will go down. Does that mean the seller is going to, say, remove the fireplace and some kitchen cabinets to keep the value of the residence that I am willing to pay before the interest rate jump on par with the cumulative lower price of the physical features I’ll be receiving after the rate hike pushes my mortgage amount down?” And “what about the fact that Wisconsin is arguably the worst labor and wage market in the nation right now? Does that explain why there is no-one bidding against me? Driving the prospective value of the home ever higher”.

She just sat there looking at me like I was speaking Klingon. The value of the home is the maximum you can afford to pay based upon your mortgage terms and that was that – it was not even a point of debate. And if I didn’t believe her, well, here were some comparable sales with prices reflecting similarly inflated values based upon the ease and availability of credit. All the comparable sales she showed me were rather recent – as they should have been – but thinking back the interest rate and credit terms that prevailed during the time of these comparables wasn’t really that much different than now. These other sale prices had been determined by the maximum-affordable-credit-terms method when credit terms, most notably interest rates, were pretty much the same. These prices were inflated to the extent that the price suggested based upon credit terms diverged from the value of the home dictated by Labor and Wage prospects, amongst other things, over and after the holding period of the home.

And here is the rub. Today’s interest rates are fantastically favorable to home ownership but Wisconsin’s labor and wage market is extremely unfavorable. Worse still, the problem of unfavorable wage, labor and other aspects of the 99%’s wealth isn’t that good anywhere in America right now, and there are still reports of declining home values to prove it. I would overpay for the true value of the home if I allowed my purchase price to be dictated by the maximum amount of the loan I could afford. If I did this, as apparently seems to be the “practice” enforced by the Residential Real Estate Sales market right now, I would then put on record a sales comparable that countless other realtors would then use to enforce the maximum-affordable-credit-terms method of valuation on other buyers. The problem would grow. It would snow-ball with each transaction so determined.

It is important to note that this SalesPerson had a signed buyer's agency with me. She was not just arguing with me in order to obtain the Seller the maximum sales price. The problem with her motivation was that the buyer's agency agreement did not change the way her commission was calculated as a percentage of sales price.

This is how “the rubber met the road” in the recent mortgage fiasco. Such practices by the Residential Real Estate Sales market amplified the loses suffered by homeowner’s that stemmed from wall street’s free and easy credit terms. Credit terms, that is, that technically do NOT create value.

telliottmbamsc's picture
telliottmbamsc
Joined:
May. 20, 2010 4:06 am

Comments

The two greatest wealth destroyers are housing costs and (health) insurance premiums - in both cases because buyers mindlessly assume that they have to buy regardless of the price. Just say no.

doh1304's picture
doh1304
Joined:
Dec. 6, 2010 10:49 am

Well, there are substitutes for property ownership, namely property renting. The substitutes for health insurance in this country are death, disability, or bankruptcy

chilidog
Joined:
Jul. 31, 2007 4:01 pm

Good observations.

It's time to hold the National Realtors Association financially accountable for their contribution to the Mortgage “Crisis” – sue ‘em all into oblivion. I think politicially such accountability might have traction - most realtors are mom and pop moderate incomed people and they could have their wealth reduced to pay for a scam that arose from the super wealthy on Wall Street! Reverse Robin Hood! Obama would love it! Free Markets!

telliottmbamsc's picture
telliottmbamsc
Joined:
May. 20, 2010 4:06 am

Its more likely that the agent showed you a house that was priced at the maxium you could afford so that they would receive the highest commission possible. If the interest rate goes up the home value does not go down you just can not afford that house any more. The same can be said if the appraisal comes back lower than the asking price you can afford more house or buy that one on sale because the bank will not loan you more than the appraised price of the house.

workingman's picture
workingman
Joined:
Mar. 20, 2012 8:13 am

Hi SueN.

Deja-vu all over again, as they say.

I wonder how they like to prepare SPAM in India. (Wink, wink ... #6)

A little curry, maybe. I wonder ... maybe instead of baking bread when you are trying to make a house for sale smell better, they cook Spam ?

I wonder where they got that neat emoti with the wink and smile.

miksilvr
Joined:
Jul. 7, 2011 12:13 pm

For a serious point about real estate, I think we need to recognize that the con agents make the lives of those who do real mortgage finance and property representation for people looking for their home far more difficult than they should. Tarring them all with that housing inflation brush is not correct.

Still, the absurdities of the housing market are wonderous indeed. My wife and I are in "the home stretch" of a "short sale" purchase in Portland, and it has been an 8 month story that ought to have been its own Portlandia spin-off. After getting our offer accepted in July, the owner bank who held the corrupted note dillied and dallied, finally giving us the approval after two false alarms at which point we entere the true Kafka phase.

Having been pre-qualified at slightly less that double what we were asking for on a property that is significantly undervalued due to squatter's and a whole foreclosure gone wrong story that deserves its own chapter, we were stunned when the inspector our mortgage lender provided a long list of things that had to be fixed before we could take possession. Ah ha, I said, the inspector was doing what his job was in a normal sale. In a Short Sale, the owner bank will do absolutely nothing to bring the property up to the conditions that normally apply to the sellers. We were faced with being denied our mortgage because of the things we have the money to fix after getting the house for far less than it would be worth were it fixed up.

Our excellent real estate agent who has earned her commission tried to explain to the guy that the reason the house was 'substandard' was why it was 100k less than the houses around it. Duh, one would think. If anyone wants to look up the house on N. Mississippi in Portland where the OWS Anarchist group was evicted after a year of occupying our intended abode, it was last summer and Channel 2 had some fun footage.

(The OWS Anarchists did not know that the house was not actually foreclosed and would not have squatted in a house owned by a real person rather than a bank. They were sorry for the pain the woman caught in that mortgage, bankster malfeasance, but the cops still busted down the front door to evict them. We are getting it fixed, of course, but the squatters may have littered, and they burned a lot of harvested wood in the fireplace. But they treated the house well. They even left behind some stuff we could use along with truckloads of what we had to haul. But, the evil ones are the banksters).

The bankers who are coming to our rescue/aid are not the bankster kind. They are helping us navigate very complex waters and staying up very late at night to beat the deadlines. Our real estate agent has workd WITH us and spent a lot of her time helping us get things worked out. I think people do tend to look at property at the top of their affordable levels. There are good reasons to get into property within a sensible scale of value. Speculation is not where value can be found, but you can make a ton of quick money.

Our house was a Depression Era Street of Dreams tudor in a neighborhood the city fathers decided to upgrade from its past as the support stream services for the local race track. They converted the race track into a rose garden and larger park, and built these lovely but definitely not "grand" houses in a fairly large swath of N. Portland. The house has "bones" and the utilities are in back. The living-dining space is really good. We have excellent house dar.

Having good help getting to the house that is right, including people who really do provide good mortgage service, is something I value. While we have every good reason to have very serious criticisms of our financial games and the very idea of housing being the asset against which you finance the rest of your life is nuts. Having people who can parse the insanity is really great.

drc2
Joined:
Apr. 26, 2012 12:15 pm

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