Bob's Blog

       Economics 101 & real estate    

From Thomas Sowell's book Economics 101:

"When a large employer goes bankrupt in a small community, or simply moves away to another region of country, many of the business' former employees may decide to move away themselves- and their numerous homes go on sale in the same small area at the same time, the prices of those houses are likely to the driven down by competition.  But this does not mean that people are selling their homes for less than thert "real" value.  The value of living in that particular community has simply declinged with the decline of job opportunities, and housing prices reflect this underling fact.  The new and lower prices reflect the new reality just as well as the previous prices reflected the previous reality.  A survey of home prices in a number of upstate New York cities that were losing popualtion in the 1990s found that homes prices were falling in the particular communities, while home prices were risng elsewhere in the same state and around the country.  This is exactly what one would expect on the basis of elementary  economic principles.  The rising prices were no more "real" than the falling prices.

The most fundamental reason why there is no such thing as an objective or "real" value is that there would be no rational basis for economic transactions if there were.  When you pay 50 cents for a newspaper,  obviously the only reason you would do so is that the newspaper is more valuable to you that the 50 cents is.  At the same time, the only reason people are willing to sell the newspaper is that 50 cents is more valuable to them than the newspaper is.  If there were any such thing as a "real" or objective value of a newspaper- or anything else- neither the buyer nor the seller would benefit from making a transaction at a price equal to that objective value, since what would be acquired would be of no greater value than what was given up.  Why bother to make the transaction then?

On the other hand, if either the buyer of the seller was getting more than the objective value from the transaction, then the other one must be losing- in which case, why continue to get cheated?  Continuing transactions between buyer and seller make sense only if value is subjective, each getting what is worth more subjectively."

I was asked last month to appraise a home using no foreclosure re sales.  Unfortunatly, foreclosure re sales are the "new" value.  In many areas, not all, there are so many foreclosure re sales it dwarfs sales from typical buyers and sellers.  Two years ago this was not the case and lenders now are asking for comparable sales 3 months back instead of 6 months.  Appraisers are asking Realtors for data on pending sales and "under contract" homes to help with this.  On the bright side, several appraisals last month were marked "steady" instead of "declining" markets so hopefully the market is poised for recovery soon.

Your comments are appreciated,