Demand driven by what looked like free money for everyone who asked for it drove home prices to new highs at a historic pace. These prices led many to a euphoric high and false sense of financial security. Leading many to go on consumer spending sprees, this new found wealth became available through equity lines of credit and refinancing, in a word taking on more “debt”. Backed by the “asset value”, that is those inflated home prices. Are they immune from personal responsibility?
Today as those homes sit on the market with prices going lower by the day, you hear that term “asset value”, mostly in the context that no one actually knows what it is, or it is difficult to determine. Many banks are holding homes in their portfolio to avoid this discussion. They are not placing the foreclosed homes back on the market, they are holding them and waiting. Waiting for a bail out? Waiting to tell the truth about real asset value to avoid reporting losses? Waiting, possibly paralyzed by the fear of what the truth will do to stock prices or even worse, facing seizure by the fed regulators? Should they be forced to liquidate these assets and take the hit?
As foreclosures continue to rise and banks hold and hide real asset values it is no wonder they are not loaning any more money. The idea that we can not determine asset values in real estate is complete nonsense. Homes sell based on supply and demand, prices are determined by the same principle. Today we have two levels of supply, there are the active listings, then there are the homes owned but not actively for sale, sitting vacant and waiting. The asset value is clearly based on the recent comparable homes sold, but they don’t like the looks of those numbers. They are hoping for miracles. There are the home owners, mostly speculators holding homes just because default is fundamentally against their personal principles, because they don’t walk away from personal commitments, and there are those bank owned homes. It is a shell game of deception and denial.
If the problem was created by excessive borrowing and speculation, will increased borrowing and lending help fix those asset values? Lending standards are based traditionally on one of two things, cash flow, and ability to repay. Ability to repay requires debt to income ratios, 28 and 36% were the standards for many years. This measure can be used to figure asset values as well. Look at the median income calculate 28% of the gross income, use this figure as the payment (PITI), calculate the mortgage amount, this would be the median home value for that market. Again, they don’t like the looks of those numbers, but no one wants to talk about affordable housing anyway. Income on residential real estate generally won’t cash flow, rents are not high enough to cover payments. Investors plan for this by putting more down or feeding the investment, taking the tax breaks and betting on future appreciation.
Back to the question, how will borrowing more money, 700 billion dollars change the fundamentals of good and prudent lending and borrowing standards? How does it affect those asset values? Are they looking to recreate the frenzy that drove those prices in the first place? Do we really need more “debt”? Those fundamental principles won’t change.
Maybe they could give the $700 billion to all of us in the form of a pay raise, and then we could make those higher house payments. Actually when you look at it that way, it clearly is not nearly enough money to fix the problem of those over valued assets. This doesn’t look all that good for those asset values going forward.
The leveraged derivatives that came out of the brokerage firms that are now dropping like flies are the really scary part of this for those looking for solutions. Talk about unknown value, those levered investments were sold to the entire world’s investment accounts. Main streets 401k’s, possibly your IRA account, state governments, municipalities, private pensions, foreign governments, on and on.
Don’t they actually mean house prices when they say unknown asset values?
Chris W. Miller
ERA Brokers Consolidated
Mesquite NV 89027
Lincoln County Land Market
Nevada Ranch Properties