Tuesday, December 30, 2008

You don't have to worry; this is necessary

We all know that the average prices of homes in the U.S. are dropping. A year ago, single-family homes were selling 18% higher than they are today. This is not news. But it is tough to know what that really means. What is 18% of your home's value from a year ago if you didn't know what your home was worth last December? Also, weren't home prices dropping in 2007 already? When was my house at its peak value? Well, if you're an average American with an average single-family home, your peak value was probably early 2005. The problem with that peak value though was that it was inflated. Actually it was probably just a lie.

Value is real when it's created based on what other people are willing to pay. If you have a house that appraises at $250,000, but people are only willing to pay $200,000, I'm sorry but your house is only worth $200,000. Mortgagers didn't care about this though. They were handing out loans based on the appraisal, and the appraisers were inflating the worth because it was needed for approval. It was a circular process, but everybody was winning. Mortgagers got their money, people got their loans, and everyone increased their "worth". Yay!

Until the purge happened. We're Americans; we can't have a good thing. If something comes along that's good, we exploit it until we kill it. It's like with that show "Who wants to be a millionaire" (the Regis version, not the one with Meredith). Remember when that show came on like 10 years ago? Everybody was watching it. It got record ratings in primetime and it saved ABC. So what did they do with it? They put it on 5 days a week until people got sick of it. They force-fed us with Everything Regis until we wanted to kill him. Then the show started to come back to earth and now it's only on in the morning. It was too much of a good thing.

That was the housing market, and so now the purge is happening. But you know what? Purge is a good thing. It allows for fresh starts. Like the ice age. Can you imagine if a meteor had never hit the earth and dinosaurs were still around? Besides Carl Everett having one less thing to talk crazy about, instead of dogs, we'd have snorkasaurus's and instead of automatic brakes, we'd use our feet. Oh and without the ratings purge, Regis would still be dominating your television from morning to night. Nobody needs that.

So here's to the purge.

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  1. Michael Says:

    add to that - value is an abstract concept until a house is actually sold. It's a lot like the stock market - portfolios may increase or decrease in potential value, but until you sell it's nothing more than unrealized gains/losses.

  2. Self-conscious, slightly overweight teen girl Says:

    Here's to purging.

  3. Greg Says:

    Yeah I'm going to have to go ahead and disagree with you on that....

    Home values are not abstract. They are a tangible asset. And they're tied to one's ability to borrow.

    If your house drops in value below the value of the mortgage, your lender can call the mortgage due in full. Also, if you wish to borrow against your home, the value will determine how much you can borrow.

    You could argue that increases in value are slightly more abstract, but even then you are taxed upon the assessed value of the home, not what you paid for it. In that respect, it's pretty tangible if your home value skyrockets.

  4. Jerms Says:

    i gotta agree with brian on this one. the value of any asset is and always will be the value someone else is willing to pay you for it.

    this is exactly why companies have to "mark to market" their investments, or reflect them on their financial statements based on what they can reasonably be sold for today.

    granted, individuals in the housing market usually have a slightly different view on the asset because it is their primary residence and they can borrow against the "equity" they have in the property, but it is still an asset that will never be worth a dime if they can't convince someone to buy it in the long term.