Someone has posted long page ( like buying house).
He has real concern, but IMO there is no solution.
There are countries where bubble is unknown.
How do you feel or respond to his lamentation?
Why aren’t bankers embracing new valuation financial modeling that stops real estate bubbles
Too long to read, tried to copy here
=============================Original Message==============================
The last real estate housing bubble bust has devastated peoples lives and this country’s economy to the tune of 20 trillion dollars. Economic analysts are telling us bubbles are occurring once again in residential and commercial properties around the country and world. Another real estate valuation collapse could do irreparable harm to this country and its citizens.
Why in the world do lenders continue burying their heads in the sand by not embracing a new automated valuation technology that immediately stops this carnage if implemented into their lending policies?
This new valuation technology easily alerts bankers and lenders if a specific residential or commercial property has entered a dangerous bubble rendering the property’s current market value unsustainable in the future. Even worse, if these loans are sold into the secondary markets and packaged into bond-like instruments, rated high by Moody’s Ratings or S & P Ratings, and sold to the retirement funds, people and institutions will suffer all along this “food chain” when these bubbles bust.
Warren Buffet famously said, “Price is what you pay, value is what you get”. For years, stock market analysts have been basing their trades on value investing techniques. The essence of value investing is buying stocks at less than their “intrinsic value” and staying away from stocks with asking prices significantly above their intrinsic value according to Benjamin Graham. The discount of the market price to the intrinsic value is called the "margin of safety”.
Intrinsic value, or sometimes called fundamental value is much harder to estimate for a business entity than for a real estate property. Business entities have many more speculative assumptions the analyst has to make when compared to real estate assumptions.
Why hasn’t the valuation industry property appraisers embraced value investing analysis in their appraisal reports? Appraisers only report a property’s current single-point-in-time market value to the lenders and their other clients. Valuation experts reporting their opinion of a property’s current market value are reluctant to further opine this opinion of value is not sustainable. Their fear is it will taint the appraisal use for lending or purchasing and that their clients will never use their services again.
One fellow Appraisal Institute designated MAI appraiser (top designation in the valuation industry) wrote to me:
“I don’t see our role as appraisers to control anything about the market, nor do I take any responsibility for swings/bubbles in property value if I am doing my job correctly. Do you feel that it is our job to solve this problem?”
My comments to this property appraiser was that our job is not to be misleading to our clients. No matter how accurate an appraiser’s opinion of current market value might be, it can be misleading. If the appraiser knows his market value opinion has significantly detached from the property’s current intrinsic value, there is a certainty the appraiser’s opinion of value is not sustainable. This is because the markets forecast for this property, that makes up the property’s current market value, are unachievable due to the market’s irrational exuberance forecasts.
So there you have it. Everyone is passing the buck and washing there hands of responsibility and risk to the next person or industry.
Sellers, with the help of Realtors, are passing their properties off to buyers whose values are based on “comparable sales”.
• Appraisers are “doing their job correctly” appraising these properties based on “comparable sales” without a value sustainability analysis.
• Bankers are basing their loans on the appraised values and selling many of these loans into the secondary markets that have government guarantees.
• The secondary markets are bundling these loans into bond-liked financial products.
• Moody’s and S & P agencies are rating these financial products AAA based on the accuracy of the appraised values so they can be sold mainly to retirement funds and other institutional investors.
As indicated earlier, value investing for stock has been used for years. This type of analysis protects the informed investor from buying a stock at a price that significantly exceeds the stock’s intrinsic value potentially jeopardizing the investor’s equity.
Why hasn’t real estate industry instituted value investing analysis? Investors in the stock market that ignore value investing simply lose their equity when the stock goes down due to excessive risk taking.
But let’s drill down and see why the real estate industry ignores value investing analysis.
• Informed sellers know they are selling their property at the top of the market (I don’t blame them).
• Realtors are making their commissions (I don’t blame them).
• Valuation experts are making appraisal fees by not “rocking the boat” with a value sustainability analysis.
• Banks are making their loan fees and selling the loans off into the secondary markets without a value sustainability analysis disclaimer.
• Moody’s and S & P rating agencies making their fees by giving AAA ratings to loan bundles without a value sustainability analysis.
• The government is building political capital and economic activity by guaranteeing these financial products without a value sustainability analysis.
• Investment banks are making commissions by selling these products to institutional investors without a value sustainability analysis disclosure.
You can see why the stock market analysts and stockbrokers use value investing analysis that flushes out a stock price’s value sustainability hidden risks. If their investors loss money, they will not use their services again and possibly will sue for damages.
On the other hand, the participants in the real estate industry do not take any responsibility for there actions as indicated by the above appraiser’s sentiment “nor do I take any responsibility for swings/bubbles in property value if I am doing my job correctly”.
What is a reasonable solution to this problem that will actually make all the real estate participants more money then if we do nothing at all?
First, let’s look at the scenario of doing nothing and maintaining the status quo like we are presently doing:
• Due to the 2006 bubble collapse, appraisers are now heavily regulated and appraisal fees have dropped significantly due to emerging middlemen called Appraisal Management Companies.
• The banking industry is now heavily regulated and skittish of making portfolio or development loans they intend on keeping. They are mainly loaning to sell the loans into the secondary markets or loaning on properties that qualify for government loan guarantee, i.e. SBA.
• Current loan demand and development exceeding lenders willingness to loan has created a housing imbalance resulting in unsustainable rental rates and incredible hardships for renters.
• All of these negative reactions, including the Dodd/Frank financial reform, have not prevented bubbles from occurring again as macro economist are predicting. In fact, these negative responses are contributing to more bubbles formations.
All of these new regulations and conservative lending policies are stifling economic growth and causing even more dangerous real estate bubble formations.
By continuing to base lending practices on a property’s current market value without a value sustainability analysis is like rearranging the deck chairs on the Titanic. No matter how much regulation over site we institute in making sure appraisers accurately arrive at a property’s current market value, undetected bubbles will continue to form.
So what’s the answer?
First, encourage buyers, sellers and Realtors to continue arriving at whatever sales price they think is appropriate for any property. I agree with the above quote from the appraiser saying, “I don’t see our role as appraisers to control anything about the market”.
Second, do not change how the valuation industry is currently arriving at a property’s current market value. The appraisal process is more than adequate based on generally accepted appraisal standards and regulations that are in place.
Third, allow the appraisers to offer their clients a value sustainability analysis that quantifies exactly where their opinion of the property’s current market value resides in relation to the property’s current intrinsic value. This new technology is basically a mechanical process that is hard to manipulate. This analysis graphically shows the client where the property’s current market value opinion resides on the economic wave cycle, how far the market value has detached from its equivalent intrinsic value, and which direction the current market value is headed in the future based on the equilibrium line direction.
Forth, only loans intended to be sold into the secondary markets or guaranteed by the government must have a value sustainability analysis in addition to a licensed appraisal of the property’s current market value.
Fifth, with value sustainability analyses, rating agencies will have a full disclosure of the hidden risks associated with loan bundles. They will be obligated to take this into consideration when risk rating these financial instruments that are to be sold to institutional investors.
The benefits of these reforms include:
• Appraisers can offer a value sustainability analysis as an additional profit center and service without retribution from the client.
• Lenders can tailor their loan risk analysis on a property-by-property basis instead of loan black balling entire classes of property types. This is a better distribution of capital and keeps lending from drying up across the board. They will also better insulate themselves from lawsuits and loan take backs if full risk disclosure via value sustainability is given the secondary market loan buyers.
• Realtors will see more stable markets devoid of the lean commission years after a bubble bursts.
• Rating agencies can also better insulate themselves from government fines due to miss-rating loan bundle financial products.
• The government will have less risk of having to bail out financial institutions due to catastrophic real estate bubble collapses.
• The public’s real estate equity and retirement funds will be more secure barring a black swan event that is not remotely anticipated by the market.
Somebody has to step forward with this new standard of care reform and be the person on the white horse. Is it going to be the valuation industry, banking industry, rating agencies, or the government? If these institutions don’t take a leadership position, should buyers of real estate request a value sustainability analysis from their advisers or should they do it themselves?
As a yoga enthusiast, the idea of this ancient practice is to constantly seek balance. Similar to the practice of yoga, intrinsic value and its equivalent ending sale price intrinsic value are what make the equilibrium line that business wave cycle revolve around. This equilibrium line is a specific property’s balance going forward into the future. The closer a property’s current market value is to this equilibrium line determines the stability of our economy. The only way to stop bubble is one property at a time.
With globalization, money laundering, low interest rates, changing government policies and flight of capital from other countries, we are going to experience dangerous real estate bubbles in the future without this new technology. No matter how these events impact a property’s current market value, sustainability analysis will always cut through these disruptive forces by indicating fundamental value balance and future equilibrium direction for each property.
