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I see new sales and loan data daily. I have seen that prices have dropped by as much as 52% in some areas. I have even seen that home prices went up 40% from last year in another area. I have seen and heard that there is more pressure on the sub $500k market than there is above it. I have seen and heard alot.

 I guess that is the point. The more we see and hear the more numb to it we will all become. I am in the industry so I pay attention to everything. I have an insatiable appetite for facts, figures, opinions, and forecasts. I love it, but for those of us who are not in this industry the data must be jaw dropping. We’re up, we’re down, it’s getting better, it will get worse, no inflation, Wow! look at gas prices and food soar! If one were to just take the pulse of the housing market, I think one could come to the conclusion that we are all just getting sick of it. I don’t want to hear how bad things are anymore. I don’t want to think how much worse they can get.

 I think that the news is getting and going to get better. Not because it is better or getting better, but because that is where the tide is flowing. We have truly arrived in the information age and I think one of the biggest victims of the information age is going to be information. You really can overload on it and it can be manipulated in so many ways to make so many talking points that it no longer is valid anymore. It used to be that an economy, a market, a company rose and fell based on fundamentals. We could argue the merits of the cycles, but as businesspeople and economists we could not argue the numbers. Now, all those things rise and fall based on the common sentiment and that can be changed with the numbers which should be influencing the common snetiment. I am confised just writing about it. Numb sounds pretty good right now.

Before I begin, I would like to give credit to Sean O’Toole of Foreclosureradar for bringing up this discussion and raising this question: Why don’t we use a different, more logical, valuation approach for residential properties? Sean argues that the traditional method of using comparable sales to value residential property is flawed as it does not accuratley reflect the true value of property. By using this approach, the market is more prone to gross fluctuations as it can be influenced by out-of-whack buying and selling. As I have stated in previous blogs, when uninformed buyers buy a property at an inflated value , then all similar properties in the neighborhood become unjustifiably inflated. The cycle feeds on itself. Then, when that same uninformed buyer now sells the property at too low a price (because he never should have bought in the first place), he then again influences the surrounding property values to move in the downward direction. It doesn’t matter too much that his neighbors all have remodeled their kitchens and painted their homes. Everyone is at the whim of a whimsical market. Values shoot sky high and drop like a weight together. Right now, declining values feed further declines. When does it end? How does it end?

Commercial properties are valued using a different approach that is based on a return on value. This approach works much better as it is grounded in sounder logic and is not as easily manipulated by amaueter investors or liberal appraisers.  This approach basically assigns a number (cap rate) to an area or neighborhood. This cap rate can be better thought of as a rate of return. The nicer the neighborhood, the safer the investment the lower the cap rate, just as in  bond investing. A neighborhood in a slightly lesser neighborhood might require a higher return on investment to induce buyers, therefore the higher the cap rate. Cap rates aren’t always logical and using them is not an exact science, however the following illustration may show better why they make better sense for residential valuation.

Let’s say there is a house that is currently selling for $300,000. It is in a average neighborhood, not Beverly Hills, and not the West Bank. Similar homes in the area rent for $1,200 per month. Is this house selling for the right price? If we accept that the area has a cap rate of 6% then we can take the annual rent of $14,400 subtract out the taxes and insurance and any other costs associated with havng that house. (approx. $6,000) to come up with $8,400. We can then take that $8,400 and divide by the cap rate 6% to come up with $140,000. By this method, this house is selling for double what an investor would pay for it. 

Of course residential properties are not always investments, they are homes too. Some buyers are willing to pay more than the current value of a home because it is where they want to live. This method cannot account for that so adjustments need to be made. This method is a good starting point though. When buying a home, I would rather pay a price based on these sounder fundamentals than based on what someone else bought for down the street. I don’t know if that someone is a good decision maker or not. I don’t know if he or she just won the lottery and doesn’t care what it costs.

One aspect of this valuation method is that it clearly keeps prices more grounded. Bubbles will be few and far between. The next time you buy a house, use this valuation approach to check weather you are paying the right amount or not. If you are within a point up or down, it may be a liveable compromise to live where you want, but if you can’t rent the property and come close to paying for the house (even if you never plan to leave) then why would you want to buy it? It is still, for most of us, the biggest investment we’ll ever make, why not use sounder judgement when making it. Let’s use the numbers, not the market’s whims.

I see this phrase all the time and I still wonder what exactly does it mean and from where did it come? I believe that it means overly aggressive and perhaps unscrupulous lending practices. As a former mortgage broker/banker I am well aware of these practices, however I am also well aware that they happened far too few times to be such a pervasive term in our industry’s vocabulary.  I think that the problem with this term is that it is now being used to absolve homeowners of their responsibilities. If someone got a bad loan, it is “predatory lending” It wasn’t predatory lending when the initial teaser rate was low. It wasn’t predatory lending when it helped that borrower get the home that they really wanted, or get into a home at all. It wasn’t predatory lending when they were spending that cash out money on a new car or trip to Europe. It’s only predatory lending when the borrower can’t make the payment anymore. It’s only predatroy because the loan is larger than the value of the home. What happenned to personal responsibility? I don’t have to say that, of course, I believe that there are unsavory mortgage lenders who did, and continue to do bad things. I am the first one to say that they should be stopped. They give us all a bad name. They also aren’t new. As long as there has been a loan to be made there have been immoral people pushing that loan on people who have no business getting it. I stiil believe that it is the borrower’s fault.  Why is it acceptable to have someone buy way more car than they need or can handle, but when they do the same with a loan it is “predatory lending”? Again, it is a sign of the times and the government’s way of taking away our personal responsibility. When I overpay for a meal, it is not the restaurant’s fault, it is mine. When I overpay for a house, it is not the Realtor’s fault, it is mine. When I get the wrong advisor who wrongly advises me to get the wrong loan, it is still my fault. Hopefully, I will not use him again and I will tell my friend’s not to use him. He will be a out of business. I don’t need a regulator to tell me that he is a predatory lender. That just takes the responsibility to govern my life away from me and gives me a false sense that Uncle Sam will take care of me. There will always be “predatory lenders”, however they are not the problem. It is the sheep mentality that that word conjures up that is the problem. When did we lose the idea of self?

Activerain.com  is a website dedicated to bloggers in the real estate industry. I have recently joined and begun blogging. I will post my blogs in both places starting with this one:

WOW! What a reception I recieved after my last and first post on this site. I was instantly welcomed and offerred advice. I felt very good about this virtual place. What I found most interesting was that I was contacted first by people who have nothing to gain from me. You’d think that it would be local Realtors or brokers that would contact me first to say “Welcome, and hey, let’s do some business together”, but it wasn’t. It was fellow bloggers from across the country who first contacted me. That was very interesting.

 I am new to this blogging thing and frankly, I still am trying to find the value in it. We’ve all heard that saying ,”opinions are like a_ _ h _ l _ s, everyone has one” so I am usually loathe to give mine unless it is specifically solicited. Posting my missives for the whole world to see is daunting to say the least. It is hard to tell if anyone is  reading them, let alone getting anything of value from them, but I will continue to post them for now.

I just want to say thank you to all those who welcomed me and that I am taking your advice and perusing the site and reading what others have to say too. I do hope that, in the future, I can “pay it forward” to the next newbies.

Daily, I read about the housing and credit crisis and recession. I read the experts predict that it will last anywhere from  a few more months to  five more years. Of course, none of those experts accurately predicted this recession so what gives them the expertise or credibility to predict it’s end?

It is many of those same experts who are advocating that our government step in and rescue us from this crisis. It is our legislators that are trying to bandaid the problem. It is the Federal Reserve that is throwing more cheap money at the problem in hopes that more of the same will fix what ails us. I have heard that the definition of insanity is doing the same thing over and over again and expecting different results.

What is my point? My point is that the bottom line is that many of us made a mistake. As lenders, we got a little too loose with our credit granting guidleines. As investors, we got a little too loose with our due diligence. As real estate professionals, we let our apathy and greed get the better of us. As borrowers, we bit off more than we could chew. As legislators, we failed to predict what too much money would get us.

 Now, as citizens and poeple who live and work within this economy, we need to take the punishment that comes with excess. We need to accept the pain and move on. Asking, or even letting, the government try to buy us out of this is a huge mistake. The best way to get out of this is to let this crisis and recession take their natural course. Some homeowners should lose their homes. Some Banks should go out of business. Some real estate professionals and economists should change profession.

No pain, No gain.

We are finally in business, after many months of preparation and none too soon as we are flooded with business right now. Life is good and getting better. We love to be busy. Look for many blogs to come…

I know that this is a new site and blog, but we would love to hear from you and get your feedback. You are what this is all about.

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