Net benefits of the housing bubble

[greenslime1951]

@Fuzzy_Dunlop

More importantly, you’re almost completely wrong about marking asset value to purchase price instead of market value, except for convenience on a balance sheet. Try to refinance your condo and tell the bank they’re just going to have to use the price you paid for it instead of the current market value. They’ll laugh in your face and tell you get an appraisal because they only care about its current market value.

Then they’ll subtract your mortgage balance against the market value and determine how much equity you have in the property.

No, I’m completely right, despite your thinking I’m not. I’ll try to explain it to you.

The reason that the (refinancing) lender considers the market value, not the asset value of the property is that that property is being used as collateral for the loan. Collateralization of an asset necessarily means contemplating that it would be sold in the event of a default.

In the absence of such considerations, real property should be considered as an asset, and every accounting method on the planet values assets at the cost of their acquisition, less any depreciation (real property doesn’t depreciate).

Since most owned real property is not, in fact, being held for the purposes of resale, it is more realistic to assess its value as an asset rather than its market value.

Let me ask you this, since I can see (in my mind’s eye) you shaking your head: Imagine that you bought a house thirty years ago in Blightville, Indiana for $100,000. You’ve paid off the mortgage and are still living in the house. You read an article in the local paper that because the local Beanie Baby factory shut down last year, housing prices in Blightville are severely depressed. You call your local realtor and she confirms that this is true. You ask her what your home would sell for today and she makes a clucking sound and tells you that your home would only bring seventeen dollars in today’s market.

Is your house really only worth $17?

[Fuzzy_Dunlop]

@greenslime1951

No, I’m completely right, despite your thinking I’m not. I’ll try to explain it to you.

The reason that the (refinancing) lender considers the market value, not the asset value of the property is that that property is being used as collateral for the loan. Collateralization of an asset necessarily means contemplating that it would be sold in the event of a default.

In the absence of such considerations, real property should be considered as an asset, and every accounting method on the planet values assets at the cost of their acquisition, less any depreciation (real property doesn’t depreciate).

Since most owned real property is not, in fact, being held for the purposes of resale, it is more realistic to assess its value as an asset rather than its market value.

Let me ask you this, since I can see (in my mind’s eye) you shaking your head: Imagine that you bought a house thirty years ago in Blightville, Indiana for $100,000. You’ve paid off the mortgage and are still living in the house. You read an article in the local paper that because the local Beanie Baby factory shut down last year, housing prices in Blightville are severely depressed. You call your local realtor and she confirms that this is true. You ask her what your home would sell for today and she makes a clucking sound and tells you that your home would only bring seventeen dollars in today’s market.

Is your house really only worth $17?

You have no idea what you are talking about. Generally Accepted Accounting Principles (GAAP) requires real estate to be written down to market value.

Why don’t you read Financial Accounting Standards Board’s Statement No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets. If you can explain why FASB is wrong and you’re right I’ll concede the point. Of course, since FASB sets accounting standards I think you’ll have a hard time convincing anyone your standards are better.

[Voyager]

@greenslime1951

You are overlooking the fact that a house is, for most people, an asset that is used rather than one that is bought and held for the purposes of realizing potential appreciation.

You are confused, and incorrect, when you equate a decrease in the principal balance with an increase in equity–especially “dollar for dollar.” That condition would only be true if the market value of the property is and remains exactly equal to the purchase price. Obviously, that is almost never the case.

You could, in fact, see an increase in equity of zero (if the market value of the property dropped in an amount equal to your payments on principal), less than the amount paid to principal (if the market value dropped, but less than in the previous instance), equal to the amount paid into principal (if the value of the house remained constant), or more than the amount paid into principal (if the house appreciated in value.

Did you not read my post and his? The point is the difference in equity depending on whether or not you made principal payments. That and change of price based on market fluctuations are totally independent, and you get the total equity by adding the two components. It works the same way if your house prices goes up also. I have lots of equity in my house, I’d have a bit less if I had never made a principal payment.
Have you ever owned a house? Your misconceptions make me think you’ve never done these kinds of calculations in the real.

None of these changes in equity would affect the utility of the house, which is, as I said, its primary value to the homeowner, in most cases.

My house is worth about 3 times what a house in Sheboygan is - but the utility value is probably pretty much the same. Utility and real estate value have precious little to do with one another. Consider cars. My ten year old Saturn had considerable utility value to me but only slight resale value. The utility value didn’t change much with time, the resale value changed a lot.
People buy homes to live in, which is why the tax treatment of a first home is better than homes bought for flipping.

Now, banks (correctly or incorrectly, given the information available at the time) made subprime loans in a market where housing stock was rapidly appreciating on the premise that even if they had to foreclose, the increased value of the properties would provide a cushion against the expenses of foreclosure. Mortgage lenders try, if at all possible, to create a situation where they don’t lose anything if they have to foreclose. The rapidly appreciating values of real property seemed to create that situation, even in the case of subprime borrowers. It wasn’t, as populist thinking and late-night pundits constantly bleat, an unsound or unreasonable approach to take.

No, banks made those loans because they were dumping the mortgages on others, so if the loan went bad it wasn’t their problem. They sold the idea that you could always refinance thanks to ever increasing value to their suckers ^h^h^H customers. Foreclosure is expensive and tends to depress value, so I doubt you are right about this.

[Voyager]

@greenslime1951

Is your house really only worth $17?

Yup. Just like those beanie babies people bought for $100 as investments are worth about a buck today.
Now it would cost you more to move than to stay, and more for alternate housing, which is why $17 is unrealistically low.

BTW, if you have doc.com stock in your portfolio bought at the height of the bubble, you had better not try to convince someone it is worth that amount still. If you think it is, I’ve got some Global Crossing shares I’d love to unload.

[ralph124c]

Lehman Brothers went bust, because the bought mortgage backed securities that became worthless. Interestingly, not a single senior executive of this firm was punished in any way. The ex-president is till wealthy, but he is facing a bunch of civil suits.
I guess the lesson that the government has given to these guys is:“steal all you want, nothing bad will happen to you”.
The fact is, taxpaying Americans were made to pay the bill for these thieves 'actions-and none of them have ever expressed any remorse for what they did.

[brickbacon]

@ralph124c

Lehman Brothers went bust, because the bought mortgage backed securities that became worthless. Interestingly, not a single senior executive of this firm was punished in any way. The ex-president is till wealthy, but he is facing a bunch of civil suits.
I guess the lesson that the government has given to these guys is:“steal all you want, nothing bad will happen to you”.

What would these people be charged with specifically? I think most people would be more than happy to bury half these guys under the jail, but there generally aren’t winnable cases that could be brought against the vast majority of these people.

[ralph124c]

@brickbacon

What would these people be charged with specifically? I think most people would be more than happy to bury half these guys under the jail, but there generally aren’t winnable cases that could be brought against the vast majority of these people.

How about fraud? They were selling a worthless financial product-and one that they KNEW was worthless… They had no defense for what they were doing.

[brickbacon]

@ralph124c

How about fraud? They were selling a worthless financial product-and one that they KNEW was worthless… They had no defense for what they were doing.

Although I agree with you in theory, I don’t think they could prove that in all but the most egregious cases, none of which would involve the public faces of the crisis (eg. Dick Fuld, etc.). More importantly, in most financial transactions between professionals, there is an reasonable expectation of due diligence from both sides. Just one bank “knowing” they are selling a piece of shit CDO is probably not enough to criminally convict someone of fraud. Like I said, I would be more than happy to see some people go down, but it’s not an easy thing to prove.

[Damuri_Ajashi]

@greenslime1951

Indeed. For most people, there were large net benefits.

So taking into account this recession, people are better off? I don’t know what sort of point you are trying to make, the real estate bubble and resulting global recession are net negatives for almost everyone