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Simple Truths



June 29, 2009 – Comments (6)

I was reading an article today entitled Realty furvor takes aim at reality in which the author criticizes NAR's cheif economist Lawrence Yun's seeming stance that one of the 'problems' hampering a real estate recovery is faulty (in the author's mind 'faulty' = 'honest') appraisals.

The article closes with the following:

So, in the wake of the greatest credit/real-estate bubble the world has ever seen, we get this: On the one hand, the powers that be decide they really don't want to utilize mark-to-market accounting in the financial system. On the other, those at the epicenter of the real-estate bubble itself are advocating the use of appraisers who will come up with the "right" number rather than a realistic evaluation.

First, I strongly oppose the abandonment of mark-to-market accounting.  While I can't claim credit for inventing the term, I like to call it mark-to-fantasyland accounting.  After all, how are we, as investors, supposed to determine the value of companies and stocks without understanding, as best as possible, the real value of some of the assets that these companies hold?  What I also don't understand is, how stupid do these people think the market is?  Just because companies show better earnings on paper because of the abandonment of mark-to-market it follows that every stock analyst, purchaser, and market participant on the planet is going to be fooled by these higher earnings?  Maybe some will, but I sure hope not.  Despite the occasional mood swings between irrational exhuberance and hopless doom and gloom, on the whole I think that Mr. Market is smarter than that -- or at least I hope so.  If not, we're going to be due for a larger dose of increased economic pain ahead.

When you boil it down, whether we're talking about mark-to-market or the home appraisal issue, the question is an extraordinarily simple one -- the answer to which was taught to me by my late father while I was still very young.

"Dad?  What's that whacthamacallit worth?"

"It's worth whatever someone is willing to pay for it, son."

How on earth anyone can reasonably argue against a truth so obviously simple is beyond me.  Maybe the proponents of abandoning mark-to-market or the chief economist at the NAR never had that exchange with their parents -- more likely though, I think they simply willfully ignore it for the sake of what is convenient in the moment.  On a day when Madoff gets an enormously long sentence for perpetrating a scam which included basing victims' financial statements on fiction (and, in my opinion, deservedly so), it seems especially sad.


Russell (a.k.a. TMFEldrehad)



6 Comments – Post Your Own

#1) On June 29, 2009 at 3:41 PM, angusthermopylae (37.88) wrote:


I am glad that Fools like you and dwot are keeping up with this.  To me, it represents a long overdue change in the attitudes of the bank/real estate/appraiser relationship.  (I made a similar comment on dwot's blog, and gave her all due credit to my March 2008 post on the same subject.)

While the attitudes by the NAR and NAMB are apparent, it appears that the appraisers (and their organizations) are going to be the whipping boys for the near future.  The only question is, do they fight back, buckle under, or just counter-lobby for their own interests?

I'm a believer in the avalanche theory of chaos:  Little events can make big differences.  This NAR-NAMB effort and the comments they are making will probably have lasting affects...even unforeseen ones.

If the NAR-NAMB get their way, then the appraisers will be forced to either go along or say "Screw you...we're not going to jail."  Then there will be a fight, and some favored appraisal companies will rise to the top while others fail.  After 3-5 years, I would expect fraud investigations in that case.

If the NAR-NAMB don't get their way,  then the damage they've done to their working relationships will go on for quite a while.

Can't wait to see...

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#2) On June 29, 2009 at 5:34 PM, CMFEldrehad (99.99) wrote:

On a day when Madoff gets an enormously long sentence for perpetrating a scam which included basing victims' financial statements on fiction (and, in my opinion, deservedly so), it seems especially sad.

Egad!  Did I write that?  Of couse it's the sentence that's deserved, not the statements based on fiction!

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#3) On July 01, 2009 at 9:24 AM, Terok1313 (29.23) wrote:

I don't in any way fault appraisers for what's going on.  They absolutely are doing their jobs as best they can and taking realistic market trends into account when determining house values.  But I should also point out that your childhood lesson doesn't necessarily seem to apply in this case.  Many buyers and sellers are agreeing to a price, only to have the appraiser come in at a lower value.  That's actually what NAR is complaining about.

I guess the point is, "whatever someone is willing to pay for it" doesn't apply when borrowed money is involved.

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#4) On July 01, 2009 at 1:53 PM, angusthermopylae (37.88) wrote:


I think that's exactly the problem...and is indicative of the past:  Buyers and sellers are now having appraisers come in with a lower price...but it used to be the other way around.

And this isn't to blame all, most, or even more than your typical criminal element in any profession.  It's the way appraising works.  If one of the local houses sells for an 10% increase, then any other houses that sell after will probably be appraised some portion of the 10% also.  And it keeps creeping up.  Appraisers are doing their job, real estate agents are happy with bigger commissions, and banks are happy with bigger interest payments...

But when it works the other way (as, I suspect, now), the unhappiest people are the real estate agents and the banks.  They are on the downside of the curve, and don't want to admit, "That's just the way it works."

The root of this problem, IMHO, is the cause of that original 10% (or whatever) increase...and no one has really come forth with a good answer (I know...everyone on caps has, but officially.)

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#5) On July 04, 2009 at 1:34 PM, MKArch (99.81) wrote:


 As one of my favorite Fools and someone with infinitely more financial knowledge than myself I am hesitant to disagree with you on M2M but I'm going to anyway. If you go to the website and search through their articles over the last couple of years you will find many articles against M2M at least during extreme markets. Vernon Hill made the simplest argument at least in terms of the banks, that they should be run to maximise the long term value of their investments not the spot price of their investments.

 Were houses, CDO's etc... properly priced in 2005 and 2006? Were the dot coms properly priced in 1999? Was oil properly priced at $150/ barrel last summer and then $40.00 a few months ago and now $70.00?  Is GM stock worth $0.82/ share? You rose to the top of CAPS exploiting the fact that the market is not always rational, you of all people should know why the last price someone paid for something isn't necessarily what it's worth. There is a reason why the SEC requires public companies to disclose reams of information on their financial performance and zero information on their technical performance.

You remain one of my favorite Fools but on M2M I respectfully disagree. BTW I was watching the congressional hearings when they were supposedly trying to eliminate M2M and the issue is a whole lot more nuanced than the pundits are making it out to be. The gentleman from FASB pointed out that the intent of the rule is to allow banks to use means other than M2M when there is no liquid market and that he agreed at the time that markets for troubled assets were illiquid.

He also mentioned that anecdotally the problem seemed to be a reluctance on the part of the banks auditors to sign off on anything but M2M even when markets were clearly illiquid and the intent of the rule was to use other means to value the assets (law of unintended consequences?). The solution he offered was to provide more guidance on what constituted an illiquid market and provide some specific examples however there would be no change to the actual rule.  From what I am hearing since then the improvement in the banks is not due to the M2M clarifications (reported as changes) but due to improvements in the liquidity and prices of the troubled assets.



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#6) On July 10, 2009 at 7:03 PM, MKArch (99.81) wrote:


You need to have a talk with you co-worker Joe and explain to him that he is mistaken Old G.M. is worth $1.15/ share or $702M. Sorry Russell I couldn't resist :)



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