[quote=no_such_reality]The banks just look at the comps from the last six months and that’s the price.
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And this practice drives me absolutely fucking batty.
As has been discussed (and I think generally agreed upon here at the Pigg), a home shouldn’t be viewed as an investment by the buyer. It’s a place to live; an alternative to renting. Perhaps a long-term hedge against inflation. But, first and foremost, it’s *just* a place to live.
For the LENDER, however, a home is NOT a place to live, an alternative to renting, or a long-term hedge against inflation. The note on the home is an investment, plain and simple. Lender gives borrower money, secured by home, and borrower is expected to pay that money plus interest back to lender over a period of time. So, for the lender the mortgage on the home is absolutely an investment.
So, how do the lenders go about “valuing” the collateral underlying this “investment”? Why, they just look at what other folks are willing to pay for similar collateral… potential cash flows be damned! Wouldn’t it be be smarter… maybe, just maybe… for the lender to take into account what the house would rent for in case, god forbid, the lender ends up taking back the house? Market rents aren’t that hard to find for most houses. (Ask yourself: How difficult is it for you to figure out roughly what you should be paying in rent for a typical 2,500 square foot house in X area of San Diego? With Craigslist and other free online services – which are pretty blunt instruments – it’s not that tough. And that’s for the non-professional. Appraisers have access to all sorts of rent and market data not available to the general public.)
Now, clearly there’s a price point above which houses tend to become disconnected with rents. Here in San Diego I’m guessing it’s around $800K (I’m pulling that out of my ass). That’s when it turns into art – who really knows what the thing is worth? And lenders justifiably ask for larger down payments on such properties.
Condos are straightforward in this regard. They’re just apartments that one owns. But I think most houses need similar treatment in the appraisal process. Lenders should be valuing homes more by what kind of cash they would generate than by what the most aggressive marginal buyer is willing to pay for something similar (regardless of the underlying economics), which in turn is often driven by the financing terms of the most aggressive marginal lender.
Sure, this would certainly increase appraisal costs – probably a few hundred dollars as you’re adding in a couple of hours of extra work. But I think it would be worth it. And it wouldn’t be a perfect system by any stretch – but it would be a HELL of a lot better than the system we have now, which seems borderline absurd.
