CYA, the New LTV
Home values continue to fall, caused chiefly by the swelling numbers of people who default on paying money they owe to a bank so that they can own a home. So which of the following two statements is true?
- Home prices are correcting.
- Or, house prices are in a deflationary spiral.
Has the question ever been one of strict economics, or is the debate a mix of economic theory and political leaning? An Adam Smith purist would say that a worker’s willingness, personal need, and capacity to pay to own his or her home will set house prices where they ought to be–often closely bonded with area rent trends and/or household income trends.
A behavioral economist might have an equally strong argument around the negative multiplier effect of home price deflation, which powerfully impacts how consumer spending, which is about 68% of GDP, works.
Clearly, the way that too many American homeowners treated their home’s deed and title as if together they represented a bonafide additional wage earner in the household was lunacy.
Also clear, is that unregulated financial productization set off a feedback loop of structured investment vehicles that programmatically trumped human judgment and accountability.
So it stands to reason that a once-bitten market is twice shy about resuming business with much of a normal set of rules of engagement. Everything must be hyper-vetted and de-toxified for any decision-maker to stick his or her neck out about financial exposure anywhere.
So we’ve gone from being a society that was practically telling people that owning a house was better than having a real job to being a one that is more or less saying that if someone wants to buy a house, we’re going to make it as difficult as possible for them to do that.
One of the new barriers to entry for buyers and especially sellers of new, used, and abused homes–appraisals. A) They’re going to have to pay more for an appraisal thanks to new rules that went into effect May 1. And B) Comps in every submarket are sending appraisals into algorithmic value destruction when they factor in distress and stagnation.
Who this helps other than investor flippers is a mystery.
We know appraisals were one of the phenomena that got sucked into the vortex of financial insanity. Like everything else, there were people who were doing appraisals irresponsibly because the way the system worked, it rewarded jacked-up prices and punished realistic, accurate ones. What’s more, prices had so de-coupled from their historical trends, that appraisers could mark prices up willy-nilly because the system rewarded that.
Now, the overshoot effect has taken firm hold as LTV has morphed into CYA.
- Here’s Big Builder editor Sarah Yaussi’s analysis of home builder reaction to the recent ramifications of the new appraisal code.
- Yaussi dives into the topic in her blog post today, getting at one of the key issues in the appraisal flap. “Comp-ing” real estate assets in this environment is ludicrous, and puts new-home offerings at a severe disadvantage in light of the premium value new construction offers the buyer.
- The Wall Street Journal followed Big Builder on the story with a consumer take on the same hot-button issue.
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