The banks hold the key to a recovery

I just received a comment from some one saying that real estate value is relative. He was referring to an article I wrote discussing the fact that 80% of the home owners in Las Vegas have a mortgage that is worth more than the underlying real estate.


I agree with this statement of course because the appraisal system is for pricing residential property typically relies on the comparable sales method to set value. If you neighbor sold his house yesterday for 200,000 and it is similar in size and detail as yours, you will not be able to sell your home to someone for 300,000 the next day. Unless of course they are willing to pay cash and are ready, willing and able to purchase, you would have no need for an appraisal. If your buyer is financing the property it is a different story.

The mortgage system is set up in such away to protect everyone. It protects everyone if the parts are working correctly to carry out the checks and balances meant to keep unscrupulous sellers and lenders from taking advantage of buyers.

So pricing is relative when you compare with your neighbors and appraise property. However, most people could care less about relative value when the bank holds a note in an amount twice the value of their home. R
Read more on the how the housing crisis has devastated many Americans. 
We are seeing this in many areas of the country, especially in Las Vegas. There will be no speedy recovery as log as so many people are underwater with their homes and burdened with debt that may never be able to be paid back. There is a chance that home prices not get back to 2006 levels for twenty years.

It makes the bailouts for the banks seem even more ridiculous.

edited repost from 2009 applies today. Home owner left to shoulder burden of crisis alone

I hear it at least once a day that people should not have taken out loans they couldn't pay for when purchasing a new home. But I rarely hear anything to address the fact that many people that have real estate are making a financial decision not to pay. I don't think it is realistic to say that people making this choice are irresponsible or unreliable. Anyone who says that these people are of less character and integrity than the average American is revealing their myopia.

The truth is that a lot of people made prudent investments based on a lot of very plausible assumptions.

1. Real estate typically goes up in value or stays stagnate except in a few areas of the country that tend to have more boom and bust cycles as in Los Angeles, Texas or Florida.

2. There are significant tax benefits to owning real estate even as a second home or investment or income property.

3. Real estate financing has been one of the few ways left for the little guy to build wealth and to live and work as an entrepreneur starting with very little cash.

4. The sub prime market was much smaller a few years ago and there was less likelihood that foreclosures would saturate and drive down the market and few people knew of or understood how the Credit Default Swaps were over leveraging the RMBS players, putting the financial system perilously close to collapse.

5. Banks and lenders held an implied duty that they would reasonably attempt to qualify buyers

6. Politicians were assumed to be looking out for American citizens and would not allow the corruption at Fannie Mae and Freddie Mac, and to have some regulatory authority over the convoluted credit default swap market and to not allow the banks and investment banks to mix good quality loans in packages with poor quality loans.

These assumptions are not wild and crazy. They are very reasonable based on the date over the past 60 or 70 years. But now the entire economy is suffering from lack of oversight from congress and the pillaging of the housing market by Wall Street.

Now that real estate values have plummeted --through no fault of the borrower-- why are we expecting the individual home owner to shoulder the entire responsibility for the crisis. IE. By being the only party involved in the RMBS debacle that has to take losses without a bail out and be the only principal in the crisis forced to mark their property to market. The banks have been given a free pass and allowed to mark-to-model, covering up their dire capital positions.

read more on mark to market accounting here

Don't forget the banks willingly took property as collateral that is now worth half of its original appraised value.  It is crazy to burden the home owner with an undewater mortgage.  If you want to have a free market, then have a free market.  Let the banks fail and let the home owner fend for themselves.  The free market is only applied when it benefits the bankers and when it would put them out of business the free market is totally forgotten.