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For many years, we in the real estate profession have told people that the value of a house is the price that a willing buyer and a willing seller agree upon. Over the past couple of years more and more house transactions between a willing buyer and a willing seller, with an agreed upon price, are being torpedoed by appraisals that come in below the agreed upon price. So my questions are what is the value of a house? Who determines the value of a house? How is the value of a house determined? How should the value of a house be determined?
I'd be interested in hearing what answers people in the real estate and related professions have to these questions. Thanks.
The shift has not happened over "a number of years" -- it has happened in a less than a dozen months. The driver for the shift is / was the enormous stupidity of Fannie Mae / Freddie Mac and all the thrid party purchasers of MBS...
The "new value" is an attempt to get more of a "floor price" on what a lender stands to lose on a property, but even in the most egregious worst case scenario the borrower would not default quickly enough on a new purchase to fetch that floor price and there is simply no telling how stable prices are likely to be when / if a future default happens.
The "solution" is a classic "closing of the barn door" after all theives have run off with the livestock and paradoxically makes the VALUE of properties (which are the underlying collateral of loans that the lenders want to stabilize...) more likely to ERODE.
I think the over-reaction is somewhat understandable, but I really would hope that the lenders also want to FIX the over arching problem not by making ALL deals harder to close, but by applying standards that are clear and transparent. The "last might uh-oh" aspects of the "failed to appraise" is terrible. Lenders ought to be MUCH MORE CUSTOMER ORIENTED and have a preset range of option, that MIGHT include additional financing options as well as legitimate, open, tranparent mediation process where tru arm's length appraising is not unduly influenced, but the known qualities of comparable properties and the circumstance of the sale are fully considered.
These things DO NOT fit into the mindless, robotic, "remote support", one-size-fits all model of lending that the mega banks believe is most profitable BUT the fact is that if the banks recognize the HUGE RESPONISIBILITY THEY CARRY for the the collapse of values through lax lending practices and the near-total meltdown of the banking system that THEIR incredibly ill managed system of MBS wrought they should be grateful that there are not more onerous limits on their conduct.
The "market" for an indivual sale of a one residential property is pretty well disclosed: the seller and buyer come to agreement after sometimes tense negotiation. The number of "potential buyers" that have likely by-passed such a home is almost always a function of the time on market, with more desirable / better priced homes going under contract signficanly faster than the average, and homes that have a smaller buyer pool remaining longer on the market. I suspect that some bright econometrics person could whip up algorithms that will predict which homes are more likely to be retain value and which are not based largely on the speed with which they sell through multiple sales. I would bet such a model would be far more informative and useful to lenders than other widely promoted but poorly accepted model like Case-Schiller...
Yes, this is true. And if the buyer wants to pay cash for the house they can do that without any problem.
However, if the buyer needs a mortgage, the lender will only loan that amount of money that the market dictates. And one sale does NOT make the market.
Say, for instance, that a house is on the market for $150,000. Recent sales in that neighborhood of comparable properties have not exceeded $120,000. The buyer could buy that house cash if he/she wants to. However, if the buyer needs a mortgage, the lender will only loan that amount that the MARKET says the house is worth.
Would YOU loan more than what you could possibly get back if you had to foreclose and put that house on the market?
For many years, we in the real estate profession have told people that the value of a house is the price that a willing buyer and a willing seller agree upon. Over the past couple of years more and more house transactions between a willing buyer and a willing seller, with an agreed upon price, are being torpedoed by appraisals that come in below the agreed upon price. So my questions are what is the value of a house? Who determines the value of a house? How is the value of a house determined? How should the value of a house be determined?
I'd be interested in hearing what answers people in the real estate and related professions have to these questions. Thanks.
I agree with you for the most part, the value of a house is what a willing and able buyer and a seller can agree upon. However in most cases the buyer isn't able without the help of a lender so the lender is a party to the transaction as well and the value of the house is what all three agree upon.
A house is worth the cost of the land and the construction cost in Sq Ft (approximately $86 x the square footage). That is what the Insurance will give you if it burns down and that is what it's worth.
I still think the value of the house is what a buyer and seller agree that it is. If a buyer has cash, then it's a done deal. If the buyer requires someone else to help them purchase a house, then it doesn't matter what the buyer thinks the value of the house is. They can't put their money where their mouth is.
The values are different because they are coming from different perspectives. The lender doesn't care that the buyer has looked for a year, or that this house is next door to their sister. 80% of my market so far this year involves some type of loan. So 80% of the time, the value is determined by what the lender is willing to lend, and the buyer and seller are willing to agree on as a result of the loan. The other 20% is strictly between buyer and seller.
A house is worth the cost of the land and the construction cost in Sq Ft (approximately $86 x the square footage). That is what the Insurance will give you if it burns down and that is what it's worth.
You just defined replacement value. Market value is something different altogether.
The shift has not happened over "a number of years" -- it has happened in a less than a dozen months. The driver for the shift is / was the enormous stupidity of Fannie Mae / Freddie Mac and all the thrid party purchasers of MBS...
FNMA/FHLMC marches to the beat, set by HUD.
Almost every penion plan, unqualified retirement plan, insurance company and mutual fund has a big piece of the MBS pie.
Over the past couple of years more and more house transactions between a willing buyer and a willing seller, with an agreed upon price, are being torpedoed by appraisals that come in below the agreed upon price.
So long as the buyer pays cash for it, the two parties can agree on any amount they want.
If however , the buyer needs financing, third party interests require protection.
Comps are blowing appraisals, not appraisers.
I have yet to have a deal blow because of an appraisal. I know my market well enough to know what's what going in and can defend the side I represent, with the facts of the market. I also almost always know why a place sold for what it did, when it did.
If some lenders impose and require their hired appraisers to "hair cut" values, that's a different story.
A house is worth the cost of the land and the construction cost in Sq Ft (approximately $86 x the square footage). That is what the Insurance will give you if it burns down and that is what it's worth.
Not exactly .....
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