Wednesday, March 25, 2009

Our Brave New World and a change in my understanding of mark to market accounting

When I went to the AOL site this morning to get my email I found a new feature that's like the home price estimator at Having nothing better to do, because corporate recruiters are still among the unneeded and undervalued if not toxic assets of this economy, I clicked on it.

No surprise in the valuation. Our home is now estimated at $330,000, down about 30% from the $470,000 that zillow was estimating it at the very peak of the real estate boom valuations in July of 2007. What was really interesting is that AOL Real Estate has a much better satellite or aerial photo of our home and lot than the one I last saw on zillow a few months ago, and I can almost precisely date that photo.

That photo, a very clear one, shows the redbuds and the crabapples in bloom and my garden as a rectangle. It also shows the big hybrid poplar nearest the house, a tree we had removed in 2006, still in place. Finally, it shows the white plastic recliner out on the lawn in the sun. So it has to have been taken in the late Spring, about mid May, of 2005, almost surely on a Saturday or Sunday since I was working pretty intensively on the weekdays during that period. We all still thought real estate values would rise forever and the biggest business problem at my contract employer was the difficulty of continuing to hire enough new people to expand fast enough to ensure that the other commercial mortgage companies would never catch up in our specialized market niche.

First off, what a brave new technological world we live in. A couple of clicks and I'm looking at an image of our house and lot from above, an image clear enough so I would probably be able make a good guess at the tee shirt I was wearing if I had been in the recliner when it was taken. I think that image is from a stitched together pastiche of aerial photos rather than from a satellite photo. The implication is that the entire country, if not the world, is now imaged at a resolution of about a foot and searchable. Somewhere, some biology graduate student who knows that polar bears do not shit in the woods is counting the brown blobs on the snow and writing a paper on how many craps a polar bear took last week and how far apart they are. Somewhere else, someone with different interests is occasionally stumbling across a picture of a California or Florida swimming pool owner who thought he or she could take a dip in the nude in total privacy.

But enough of that line of thought. I have serious quibbles with the rather simplistic calculation assumptions that zillow and now AOL make about home values. Our home, for instance, appears to be valued almost soley on the basis of its square footage and bedroom and bathroom count. The system they both use assigns little or no value to the land that our home sits on, a much larger and infinitely more private lot than those of the houses presented as comparables. This is only natural because it's no doubt impossible, at least now, to put a value on purely esthetic factors, But the AOL valuation also misses the potential for subdivision of our five acre home lot.

Which brings me to my other point. The other day I asserted that the value of something is simply what someone is willing to pay for the thing. On Commentary Magazine's Contentions blog yesterday I came across a comment that made me recognize a slight wrinkle that I hadn't considered which is perfectly demonstrated by my reaction to AOL's valuation of our house. We, the owners, have a better understanding of both intangible and tangible factors that go into the value of our house. We know that the privacy has great value to us, if not to others in the general marketplace; and we also know that the lot is subdividable.

So there is no way we would trade our house and its lot for one of the comparable houses worth $370,000. As the commenter on Contentions correctly pointed out, accounting for value has to take into consideration the price at which the owner of an asset would be willing to sell it as well as the price at which some other party would be willing to buy it. And for thinly traded assets that bid versus asked spread can be pretty wide. For our home, for instance, the bid versus asked spread is more than the current bid price, at least as simplistically arrived at by zillow and AOL. We might sell if someone showed up tomorrow with a check for double the valuation on AOL; but I'm not sure. Even putting aside the pretty tangible value of subdivision we might not sell. Linda and I both like the pond and the privacy a lot.

So we're back to this question of mark to market accounting. The banks unwilling to sell those so called toxic assets at current bid prices presumably understand those assets somewhat better than the potential buyers do. Hence, the toxic assets are worth more than the bid price as I asserted the other day; but how much more? The mere fact that my best answer to that question is "Who knows?" says that this question of mark to market accounting is more complex than I asserted the other day.

Do bankers know the value of the assets in their vaults? Do bears shit in the woods? Do Californians and Floridians swim in the nude?

Not always.

And - in somewhat related news, here's a 3 minute speech by a member of the European Union parliament that's fantastic. We should offer this guy citizenship and elect him to our congress. It would be refreshing to have one politician down in Washington who makes sense.

"You cannot borrow yourself out of debt."


Anonymous said...

I know that the County has our home assessed for a great deal more than it is the tune of $50,000 or more.

We've decided to let an attorney challenge the County regarding the taxes. The fees are usually quite nominal, because they make it up in volume. There's plenty of homeowners whose assessments are over the top.


Anonymous said...

I forgot, Arnold Kling posted something that made reference to derivatives. Scroll up when you get there, and you'll see it. Perhaps you can teach them a thing or two. :)

I was also hoping you would show up over at TCS when they began to talk about mortgages. People really need a good education where mortgages/derivatives are concerned.

BTW, you said that Linda reads this blog. Hi Linda! :)