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Wednesday, October 15, 2008

The concept of “value”…

I get this phrase from homeowners a lot when I’m out doing market analysis calls – “I’m not going to give my home away.” Well, no, I’m not asking you to give the house away, just to sell it for the current market value. The market is cruelly efficient in this regard. It doesn’t care what you paid for the house. It doesn’t care what you “need to get” from the house. It doesn’t care what you owe on the house. The market just looks at it, compares it to other similar homes that have sold and which are on the market and sets a current market “value.” That’s all that you are going to get at this time – take it or leave it.

The concept of anything having some innate or attached value is one that we tend to apply differently to different things around us. In reality, nothing has any innate value; it only has attached to it the value of what we or others are willing to pay at any point in time. We seem OK with the fact that certain objects that we possess have a value and then depreciate over time, perhaps as they are used. Cars come to mind immediately. There used to be an old axiom that a car lost 40% of its value the minute that you drove it off the dealer lot. That isn’t as true any more, but it is still true that cars depreciate over time; unless you hold on to them for a long time and they become antiques or rare, at which time they can actually start to go back up in value. Why? Because now others are willing to pay more for something that is rare.

Underlying the value of houses is the value of the land that they are built upon. As I stated a few days ago in the posting about the $1.75 house in Saginaw, the land value of that property has to be worth more than that. The house itself is considered to be an appurtenance or improvement to the raw land. It is trying to put a current value on that improvement that is so tough these days. We have become accustomed to steady, sometimes dramatic, appreciation in properties and have come to believe that houses always appreciate (unless of course they are turned into dumps by the owners). We were told that over and over by the government and the mortgage industry as part of their campaigns to encourage home ownership. In reality there never was and never will be any guarantee that “values” will always go up. We’ve certainly seen that lately, with declines in this area of 20-30% over the last 2-3 years.

How can that be, you may ask? Well it’s simple. There are fewer people out looking; and they have less money to spend. There are lots of foreclosed houses competing for their attention and those foreclosed houses are the ones that are setting the market price for whole neighborhoods and house types. The market says that the 1970’s built, 1,500 Sq Ft, 3 bedroom, 1 and a half bath Tri-level that you paid $215,000 for in 2003 is now only worth $165,000, because that’s all that people out looking today will pay. That’s its new “value.” It’s no different than owning an once of 24 carat gold. Today that ounce may be worth $850, but next year it may only be worth $500. Has the once of gold changed? No. Want has changed is want people are willing to pay for it. It has no innate value, nor does your house.

Unlike the stock market, which has gyrated wildly lately and is now down over 30%, home values are not likely to rapidly recover the lost value from this downturn. The home market is undergoing a fundamental “reset” of home values. One reason is that many marginal homeowners – those who should never have been given a mortgage in the first place – have been forced out of the market and will not find it easy to return. Home builders overbuilt the market when it was easy for almost anyone to qualify for a mortgage; so, now we have an oversupply of homes, especially in the $200-300,000 price range, that will take some time to sell off. Unfortunately, those are the “move up” homes for the middle class that is currently being racked by fear, uncertainty and doubt about the economy and jobs; so they have just been sitting on the market. Only when things settle down in the economy overall will we have the chance to get back to a “normal” supply and demand driven home market. That may to take years.

So, when I show up and tell you that your house is now worth $175,000 in this market, I’m not asking you to give it away; I’m just helping you understand its current market value. If you don’t want to (or can’t afford to) sell it for that price, then don’t sell now. Wait until the market comes back and it appreciates back to a level where you can sell it. That may be 5-10 years down the road, given the level that we have fallen to with home values. In the mean time, I’m out there with buyers looking at homes. If your home is priced right and on the market, we’ll look. If not; oh well. At least you can sit there and content yourself that you‘re not giving it away. And you can tell yourself that the shag carpet in the living room is probably good for another 15 years, too.

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