On Time Appraisal

IndyMac bank is a good example of what went wrong during this lending cycle of 2002 through 2007.  See the article:   CRL - What went wrong at IndyMac

Most of the problems with bad loans come from the lenders themselves where they made loans knowing the borrower could not pay back the loan.  There was fraud by both the lender and the borrower and in some cases the appraiser inflated the value of the property to make the loan work.  However, in a rising home price market even these issues are not visible because a borrower could refinance or sell the home.  Also take note that the traditional means of sourcing money for the loan changed from depositor money to secondary investor market money.

When home values peaked in 2006 and defaults began to rise, the lying, cheating and stealing began to become visible.  Homeowners no longer could refinance because property values were flat and beginning to decline.  Short sales started to grow as more homes entered into the foreclosure process.  This put pressure on the housing market as home for sale began to grow.  With rising short sales and foreclosed properties being dumped on the market, housing prices started their decline.  The secondary investor market began to dry up.  That caused a number of mortgage lending companies to go bankrupt because Wall Street would not fund their inventory of loans to be sold to the secondary investor market.  Credit began to dry up.  Getting 100% financing to buy a house was hard to get.

Once the secondary investor market collapsed, lenders that were getting their funds replaced by selling the loans that they made to these investors had to had the loans.  As more defaults climbed, the lender themselves suffered losses.  With no funds available to make new loans, lenders began to expand their depositor base and offered higher interest rates to attract new deposits.  Defaults continued to rise at alarmingly high rates, which put more pressure on home prices as short sales and foreclosed properties piled up on the market.

In 2008, 80% of loans made are sold to Fannie Mae or Freddie Mac because there is no secondary investor market.  Investors wanted a federal guarantee on the mortgage paper they bought in case of default.  However, even the big players like the two government-sponsored enterprises are suffering from defaults.  The problem of lying, cheating and stealing had really been covered over during those years where these loans were made.

Now the question is being asked, how much worse will this get?  Will housing prices continue to fall?  Will banks continue to fail?

A picture is worth a thousand words.  Realize this graph is the Case-Shiller index for the San Diego metro area along with other western metro areas.

Many times people would like to know about the cost approach to value.  Realize that what something cost does not equal value.  Many times when looking for a home, people want it now.  They don't want to find vacant land, buy it, get site plans, designs for the home, go through the building permit  process and then wait for a home to be constructed.  Also realize that tract homes can be built cheaper than a custom home through the economy of scale.

What a home sells for may be less than what it cost to build.  In declining markets, this can be especially true.  In rapidly rising markets, it often times is cheaper to build but people do not want to wait.

Sometimes it is useful to have a rough idea of what the structure costs are to replace your home.  For example, if your home were to burn down, do you have enough insurance to replace the structure?

The very best way to know how much it costs to replace your home would be to get a contractor to give you a bid.  However, they are not very inclined to do this for free.  There are cost services like Marshall & Swift that appraisers will use to estimate replacement cost.  But, for the average home owner, free is the best.

I want to introduce everyone to a free web site called Building-Cost.net where if you click on the button START CALCULATOR or START CALCULATOR you will be on your way to getting a rough idea of what it will cost to replace your home.

Remember, however, that are other costs associated to replacing your home such as the contents of it.  Consult with your insurance agent to get the complete cost and the insured value.