By Mark L. Stockton
Here’s the bad news: At purchase, this homebuyer was able to secure a 95 percent loan with payments structured to start off small and increase over time as her income and equity grew. Ecstatic at the prospect of being able to own a new home with a modest down payment, she was unaware of the danger that lay ahead. So too was her lender, apparently. She can be forgiven; she was not what is sometimes referred to as a “sophisticated investor.” How can an average consumer be expected to understand market dynamics and complex financial dealings? Isn’t that why they rely on professionals?
The lender, however, should have known better. What happened to real estate markets nationwide soon thereafter was not an anomaly. It has happened often in the past, and it will happen again in the future. Every time investment dollars become more abundant and credit restrictions relax, you can bet this same scenario will play out in real estate markets across the country.
This homebuyer then lost her job in 2010. She was forced to confront the fact that she was unemployed and would have to compete with tens of thousands of other unemployed individuals for a position that would probably pay less than her old job—if she could find employment at all. The value of her home had declined by nearly 50 percent in the years since she had made her purchase. Instead of building equity, she was underwater on her mortgage. Eventually, her home was foreclosed and she found herself in a position that is all too common today. While not homeless, she faced bankruptcy and the inevitable emotional and financial difficulties that ensue.
If the proper tools and analytics had been available to the lender in 2005, chances are things would have turned out better for all parties. It is reasonable to assume that the lender, recognizing the instability in the housing market, would have modified its lending practices, and terms offered to borrowers would have become more restrictive. In fact, there’s a high probability that the instability would have never reached such extremes; lenders and investors might have acted promptly and prudently to put downward pressure on rapidly inflating sale prices, and subsequent losses might have been significantly reduced.
This unfortunate homebuyer might not have qualified for a loan at all, and would have perhaps been forced to continue renting until she accumulated a suitable down payment. If, and when, she was ready to make a purchase, she might have had to settle for a “starter home” rather than opting to buy her dream house. These, by the way, are not bad things. Until recently, this was regarded as the appropriate path to homeownership in America.
So here’s the message: Prudent lending and investing must be based on more than just accurate appraised values. Values must be scrutinized for their sustainability as well. As all parties to this transaction discovered, an accurate value for a home yesterday might differ substantially from an accurate value for the same home today. That doesn’t make either value conclusion less accurate, but it does reveal that markets fluctuate and values must be viewed within the context of current market trends and long-term sustainability.
If your current valuation solution does not provide you with both a reasonably accurate value conclusion—supported by industry standard analytics—and a reasonable measure of sustainability, you need a solution that does.
Mark Stockton is managing partner of Valuation Research, LLC, the developer of The Valuation Research Assistant© and Value™. For more information, please visit www.valuationresearchllc.com.
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