Housing will continue to Plummet
Mark-to-market M2M accounting falsely ran up the way (long-term) assets were valued. This false appreciation created a boom in housing and financial assets. The people who designed FASB accounting standards are brilliant, but do they have any commonsense or are they too close the to the problem to see the solution?
Here’s the problem with M2M: your neighbor sells his home for $250,000, and under current ‘comparable’ sales valuation rules – your home is worth $250k. Now if the other neighbor sells his home for $500,000, your home has appreciated, you’ve doubled your money, buyers rush in for this great investment opportunity. But has your home really doubled in value? Does it cost twice as much to build your home (cost approach to valuation)? Could you get twice as much in rent (income approach)? The likely answer is ‘no’ on the second 2 accounts. Could we have been this simple-ton in our approach to valuing assets? FASB M2M says “YES! we can.”
And this is how we got here.
Now, as people fire sale real estate and financial assets out of fear and panic, values are falling. The drop is accelerated by the way we are choosing to appraise properties. Comparable market appraisal methods are the standard. It says: Your neighbor who paid $500,000 a couple years ago looses his job, and stops paying his mortgage, he sells all the door knobs and the siding. Then the bank takes back the property for the loan amount of $400,000. The bank under duress from the regulators dumps the home for a fast sale for $300,000.
You come for a refinance on your home to take advantage of the newly lower interest rates. The lower payment will allow you to keep your home. But you still have a job, good credit, and have lived in your home for 10 years. The appraiser arrives and declares (based on comp approach only) that your home is now worth $300,000 – and it is in a decling market. You owe $275,000 and you no longer have enough equity to refinance.
Thousands of Americans are facing this situation. M2M is shaking the very foundation of their worlds – their home equity is gone. This is why today Consumer Confidence is at a low not seen since 1967. But have our homes really plummeted in ‘real value’ by half over the last 12 months? Were they inflated by M2M and gave us a false sense of equity – yes maybe – but by the very valuation standards that now impose an false sense of doom.
Why are we still using a flawed valuation method like M2M and comparable sales appraisals? The lender industry is killing itself and the very customer confidence we all need to bounce back from this crisis. We are encouraging defaults by telling good paying customers that they are ‘overpaying’ and owe more than their homes are worth. To what gain? Why?
Could common sense be this dead? Change the appraisal rules, combine Income approach (rents) + Cost approach (replacement cost of housing stock) + comparable market sales data (today’s only method) = blended and realistic view at housing that is fair to all parties and will save the housing industry from a bottomless and never ending depreciation.
Lastly it will right the wrong of flawed and too-simple M2M valuation. Warren Buffett believes in Intrinsic value of companies. This is more complicate than just what the last Dairy Queen sold a cone for….