-- Posted Tuesday, 29 June 2004 | Digg This Article

Topic: I do or do not have a problem with the definition of market value for realty as currently used by every real estate appraiser, residential or commercial, in the United States of America.

Gale Bullock, MAI, SRPA, SRA

Monetary Policy and Market Value

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The Dark Side of the Force

The monetary policy of the Federal Reserve Central Banking legal tender fiat paper funnie monie banking system established in the United States of America under President Woodrow Wilson's tenure as Top Kat in the White House, which is more like the Presidency of Colonel House from Texas, than the so-called learned sage from Princeton, has provided a setup for the sting. The setup is real estate. The sting is you. The Dark Side of the Force is The Creature from Jekyll Island. What's wrong with the definition of market value? Everything in the USPAP and Appraisal Institute definitions of market value, as we currently know it, if we get the Full Blown Bastard.

USPAP Definition of Market Value for Real Estate:

This definition is put out by The Appraisal Foundation mandated by Congress after the S&L Debacle and Game of Bailout, see Chapter 2, The Name of the Game is Bailout. Assuming the scenario described by my global markets pundit Mark J. Lundeen, a US Navy Veteran, who penned Mortgages: What the Banks Won't Tell You, Items 1, 2, 3, and 5 will not hold up to the last paragraph of Mr. Lundeen's essay which is shown below:

I think that in the near future, 2 to 10 years from now, you may see the US housing market operating on a cash only basis. If I am correct and the mortgage market as we now know it will become as extinct as the do-do bird on what other basis could the housing market operate? You no doubt think I am wrong in predicting this but the ultimate result of "policy" in so many spheres of our lives has created some unusual situations in the past with enormous transfer of wealth from one class of citizens to another as a result. If I am correct and a disaster does arrive, it will not be from the operations of the free market looking for a return on capital but rather by the execution of "policy" from people who think they are smarter than everyone else.

If there is an economic melt down in micro and macro realty markets, no one will be typically motivated - they will be trying to save their assets - it will be every man for himself. No one will be well informed or well advised, as they will be trying to save their assets in their best interest. A reasonable time may be fifteen minutes to save ones' assets. Normal consideration in terms of price for a property will probably reach some very esoteric levels… eh… low's that is…and the pipe dream of "unaffected by special or creative financing or sales concessions granted by anyone associated with the sale," may only exist in the Ivory Tower at The Appraisal Foundation and the those other erudite Pundits of Pabulum, those closet smoking cigar smokers at the Appraisal Institute. With respect to Item 4, payment in terms of cash in United States dollars…

Folks those haven't existed since 1913. We'll discuss this later in the essay. Now moving on to the more verbose of the Ivory Towers…

The Thunderbird Script… The Appraisal of Real Estate, 12th Edition, Appraisal Institute

USPAP boils it down to a five-step program. The Appraisal Institute must be vying for the 12-step program at Alcoholics Anonymous, with their 9-step approach to market value. Given the new Resolution Trust Corporation, which may eventually rise like a Phoenix, and given the new RTC's re-defining market value for realty, which the closet smoking Pundits of Pabulum, will be most happy to rewrite, since they play to Wall Street anyway, we shall have some great fun with this definition of realty market value as long as it lasts. Wonder what the other three steps will be when this definition gets re-written? Will the Rascals try to outlaw heavy metal coins and bars as payment for realty on the barrelhead as part of the 12-step process, in lieu of lender tender debt backed currency.

Item 1 - Which Date? Date of Divorce, Foreclosure and Becoming a Bank REO, or Date of FTAA sneaking your job off to only God knows where under Baby Bush and Bubba Baby Clinton who started this whole globalization free trade bullshit to send our American jobs overseas. Does this date coincide with the date you contemplate suicide as a realty owner, because some son of a bitch appraiser buried you alive in your home on your last refinance, to out-guess the Federal Reserve Charlatans Greenspan, Bernanke, and McTeer, since you held hands and bought a new SUV with the homequity proceeds?

Item 2 - Open and Competitive market for Whom? Huh? Property interest appraised? Can I subdivide my interest in the property and make money as well on the refinance, and get another SUV. Does this all mean that those appraiser's are gonna give me a higher value if I say my market is not competitive and I subdivide by SUV interest in the property? That being true, I suppose that 40 bank REO properties on the market in my neighborhood make my market real competitive, huh? Gee, I love that Thunderbird script on all those Realtor For Sale signs.

Item 3 - Folks acting prudently and knowledgeably? Now that's a tough one to qualify. How can anyone in any market place act prudent or knowledgeable under the Greenspan Fed and the current NeoCons in Washington, D.C., under the pre-emptive tactics of the New American Century?

Item 4 - Price not affected by undue stimulus? Under the Greenspan Fed and the GSEs and that Jumpin' Jesus Raines Kool Kat? Welcome to the Fairly Tale Word of the Appraisal Institute and its Thunderbird script. I suppose now that the new Number 10 added to the definition will include something to the effect that real estate can never be a markets bubble, since all these micros are local? That one's so great a lie, but that Goebbels kat proved, the bigger the lie, the easier it is swallowed by the governed population.

Item 5 - Item 6 - acting typically motivated and in their best interest is a no brainer, so why do we have excess baggage cluttering up the definition? Beats the hell out of me!

Item 7 - Market efforts adequate and reasonable time for exposure in the open market, sounds great in Real Estate 101, but what about in Depression Real Estate and Foreclose Rap Sheets 101? When the auction gavel goes down, that Thunderbird script gets really hard to speed read, don't it?

Item 8 - Ooops…. There's that payment made in cash in U.S. dollars again…. We shall skip that one for now.

Item 9 - price representing normal consideration unaffected by special or creative financing or sales concessions by parties associated with the sale, generally means that the price paid for the property did not involve kickbacks, a new Cadillac in the garage, or other booty in the sales price. Is this the reason why my 150% homequity line appraisal ain't really no good for marketing my house, you ask? The appraiser said my house was just great, but that silly Realtor tells me my house ain't gonna sell until I put on a new roof, recarpet, and repaint the sucker you say? It seems to me that the FED and the GSEs are always party to any sale, or any refinance… Humm? Is that undue stimulus, or what in the game of two-tiered structured finance?

About Those U. S. Dollars in the Definition of Market Value for Realty…

Real Estate is, always has been, and always will be a depreciating asset. Real Estate is, always has been, and always will be a depreciating asset. Real Estate is, always has been, and always will be a depreciating asset. Real Estate is, always has been, and always will be a depreciating asset. Real Estate is, always has been, and always will be a depreciating asset. Mozart used to do that. When Mozart liked something he wrote, that sucker repeated the Holy Hell out of it.

Explain to me how every micro and macro real estate market in the United States of America continue to percolate to the upside like the Maxwell House Coffee Maker on 2000 volts? No, it dudn't make any real sense! I have already written an essay about the subject. The essay is my Blitzkrieg Essay #5 - Ponzi and Electricity. When you have been doing the realty valuation gig since 1976 and do the cost approach daily, building costs are always increasing and land values are continually increasing…. And the same can be said for depreciation respecting physical deterioration, functional obsolescence, and external or economic obsolescence pertinent to that subject property appraised, respective of the market and the property's locale…. Yet value is always higher when I re-appraise the same property, even if it is in the same observed condition. If the owner improves the property with a new kitchen or bath, puts on a new roof, repaints and recarpets, I have lots of money to play with on the final estimate of value, because the homeowner lowered the effective age of the property. If by chance local micro markets factors such as supply and demand, increasing and decreasing returns, enhanced location, buyer appeal, or I get a whole influx of new Doctors to the market, I probably have some real and recognizable local market forces that are pushing prices and values upward. Payment in terms of cash and US Dollars make perfect sense then in light of USPAP's (The Appraisal Foundation, mandated by Congress after the S&L debacle and bailout) and the Thunderbird Script definition of www.appraisalinstitute.org, a realty valuation professional organization.

The caveat to the definition of market value for realty or real estate linked to payment in terms of U. S. Dollars is the fact that the definition of market value for realty, or real estate linked to the conceptualization of a U. S. Dollar is simply put… HYPOCRISY… on the part of those who claim that they profess the Body of Knowledge, and the Credentials to write the definition of market value for realty and real estate for everyone to use. U. S. Dollars don't exist. Federal Reserve Notes exist. I also, wrote an essay about this gizmo, or smoke and mirror. See: Definition of Market Value… (a fatally flawed definition… ?)

Monetary Policy and Market Value… or Just a Damnable Boomerang…?

Valuing real estate in a monetary system that does not exist in the real world is big problem. Coupling that with the intrinsic fact that real estate is, has always been, and always will be a depreciating asset, just compounds the problem. When one considers that the linkage between the Federal Reserve Note and the real estate is the fact that both are debt backed instruments as commodities, that within itself, in light of the other revelations I have placed before you, Dear Reader, should absolutely scare the pants off of you, and tie your Knickers in one helluva Knot.

In our view, the definition of market value for realty or real estate, will eventually help to destroy the American Federal Reserve fractional reserve banking system as we grew up with it since 1913. In the final process, Woodrow Wilson may be recognized as Traitor to the Constitution and the American People. The process may be long, hard, and painful to Ma and Pa Kettle on Main Street America, and their kids, Joe Six-Pack and Sally SUV…

When I look at real estate, I see nothing but debt… when I estimate market value for realty, I am estimating the debt the property can carry. Conceptually, a few folks at The Appraisal Foundation and www.appraisalinstitute.org, may want to do the same for the new Body of Knowledge they are going to need when the Crap Hits the Fan? Real estate inflating at the printing of Bernanke's Federal Reserve Notes is a Ponzi Shell Game -- Do these guys at the Federal Reserve… Greenspan, McTeer and his holding hands "Mercans buying SUVs, and that Bernanke Idiot with the Gutenberg printing press really think they are hood winking all of us on Main Street America?

The definition of market value for realty, or real estate if you will, is derived from Dreamland and an Ivory Tower… you might as well go to Worlds of Fun in Kansas City, hop on the Boomerang. The Boomerang certainly makes more sense than monetary policy and market value… Enjoy the Ride! 

Central Banking Discredited - Steve Roach - Morgan Stanley.

If we are unfortunate enough to get the Full Blown Bastard, a lot of Pundits at The Appraisal Foundation and the Appraisal Institute are going to have some very big Gator Bites in Their Assets, let alone mention Messieurs Jumpin' Jesus Raines, Greenspan, SUV McTeer, and the Fool with that printing press…. Got any Heavy Metal? Better than that! -- Got any Tar and Feathers? Grin!

© 2004 Gale Bullock, MAI, SRPA, SRA
aka Ole Bear
www.pgtigercat.com
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"Double Eagle"
Security Bond Specialist

Musings on Market Value

With the establishment of the United States’ Federal Reserve, in 1913, more than the debasement of our fiat currency has taken place. Intertwined with the debasement of currency has been the debasement of our language, our culture, and our perceptions of “economic reality.” When monetary central planning is adopted by a country, money is not the only thing that is manipulated. The minds of the country’s citizens are manipulated as well.

In a free-market society (which would include a 100% gold dollar), a natural tendency would be for the prices of goods and services to decrease over time. This would include housing prices as houses are consumer durable goods. The beauty of a gold dollar is that, conversely, its purchasing power would increase over time. Therefore, setting aside part of one’s money income (as savings) would be an attractive proposition for two key reasons. First, as mentioned above, the purchasing power of money would increase over time, thus rewarding savings. Secondly, a bank would pay the saver interest which is an additional reward for saving. Clearly, having a 100% gold dollar would provide an economic environment conducive to saving.

Since the establishment of the Federal Reserve, in 1913, the U.S. dollar has lost over 95% of its purchasing power. Hence, it is not surprising that the Federal Reserve’s reckless inflation has led to the common man’s expectation for the dollar to lose value over time. As the Federal Reserve intensifies the rate at which it creates money out of thin air, the common man’s behavior (in the sphere of personal finance) tends to change for the worse. He is led to speculate in response to a constantly depreciating currency.

With the expectation for money to lose value over time, there is a tendency for people to seek higher rates of return than offered by passbook savings accounts, certificates of deposit, and other savings vehicles. During particularly acute periods of money creation by the Federal Reserve (in the 1920s, the 1990s, and today for example), the common man turned to the stock market and to real estate in search of higher rates of return (via inflation induced capital appreciation). However, it is clear that the common man does not understand that his behavior had changed from being a saver to becoming a speculator. Herein lays the key as to how the debasement of our currency has led to the debasement of our language (i.e. eliminating the word "speculation" from Wall Street’s and Main Street’s vernacular and ultimately replacing it with "saving").

It is important to keep in mind that the vast majority of people believe that paying down a mortgage is tantamount to saving. Nothing could be further from the truth. Paying down mortgage debt on a consumer durable good (i.e. a house) is simply spending money and is the opposite of saving. People have literally been fooled into believing that they can reside inside of their savings vehicle. Such a foolish mindset would not exist under a 100% gold standard (under which, once again, a house would be a depreciating asset). It takes central banking, and an ever-depreciating fiat currency, to bring about such a mass delusion.

Ludwig von Mises astutely understood this phenomenon of mass delusion. In his magnum opus, Human Action, he stated the following:

Common man does not speculate about the great problems. With regard to them he relies upon other people’s authority, he behaves as "every decent fellow must behave," he is like a sheep in the herd. It is precisely this intellectual inertia that characterizes a man as a common man. Yet the common man does choose. He chooses to adopt traditional patterns or patterns adopted by other people because he is convinced that this procedure is best fitted to achieve his own welfare. And he is ready to change his ideology and consequently his mode of action whenever he becomes convinced that this would better serve his own interests.

With the stock market and the housing market appearing to be surefire paths to effortless wealth accumulation, the common man really has no idea that he is on the road to financial ruin. This ruinous road has been paved with the Federal Reserve’s fiat currency. Indeed, a mass delusion has been wrought on America by monetary central planning. Americans are speculating, and accumulating enormous debt loads, in the name of “saving”. Therefore, under such speculative conditions, it is impossible for rational market prices to emerge in the real estate marketplace.

© 2004 "Double Eagle"
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Christopher Mayer
Editor: Capital & Crisis
www.capitalandcrisis.net

Troubles With the Meaning of Market Value…

Let us start with a little analogy from the stock market*

On December 31st, 1930, White Motors' balance sheet reported cash of $8.5 million, receivables and merchandise of $15 million and net fixed assets of $14 million. Less liabilities of $1.3 million, the company had a net worth position of $36.2 million.

The company's stock price was trading between $7 and $8 per share. At the 12/31 close, the stock price was 7 3/8, which multiplied by the 650,000 shares outstanding put the market value of the company at $4.8 million. This valuation represented about 60% of the company's cash balances alone and only about one-fifth of the net quick assets. As the great Benjamin Graham noted, "The spectacle of a large and old established company selling in the market for such a small fraction of its quick assets is a startling one."

Such a spectacle was not uncommon then. Graham continued "But the picture becomes more impressive when we observe that there are literally dozens of other companies which also have a quoted value of less than their cash in bank. This means that a great number of American businesses are selling at much less than their liquidating value; that in the best judgement of Wall Street, these businesses are worth more dead than alive."

Flash forward to the year 2000. Take a look at Ariba, a hot company in that market and representative of new Internet-related businesses that buffed up the returns of many portfolios. In 2000, the company generated sales of $62 million with a net loss of $37 million. It's balance sheet was not indicative of anything much, as was typical for a technology-based company, with a book value of $1.22 per share. The company was trading for about $267 per share. Multiply that by the 96.1 million shares outstanding and you have the market's value of this company, which was an astounding $25.6 billion. That's a multiple of nearly 412 times sales.

Market value meant very different things depending on where you were in the cycle of boom and bust.

Graham created a concept called intrinsic value to distinguish it from the market price. He would likely have agreed with John Burr Williams' assessment that "separate and distinct things not to be confused, as every thoughtful investor knows, are real worth and market price." Markets prices reflect the emotions of its participants, they the manifest creation of their optimism and pessimism, their sorting and grading of possibilities, the individual subjective appraisement of value. Market prices can swing wildly between emotional poles; and swing they have, as these two examples illustrate.

Markets make opinions. Opinions are not statements of fact; not all the actors in the market will consider the same assets attractive at their present market prices, whatever the price happens to be. Its true value is indeterminate except from the viewpoint of the individual actor in the market. As Williams noted "concerning true worth, every man will cherish his own opinion."

Indeed, for the individual actor it is only his opinion that matters, only his opinion that causes him to act. The opinion of the crowd will change the data from which the individual must work, but only his own opinions, his own preferences, his own felt uneasiness and his desire to remove it, will cause him to act. Still, the reality facing every buyer and seller will be the market price; to try to determine any objective value is a hopeless quest.

Stock prices are determined by marginal opinion. That is to say, the least optimistic present owner and most optimistic non-owner determine the price. As John Burr Williams wrote in his 1938 treatise The Theory of Investment Value, "The margin will fall between owners and non-owners, the in and outs, the ayes and nays; and at this margin, opinion, mere opinion, will determine actual price."

Consider one hundred people holding the stock of a particular company. Suppose 99 people believe the stock is worth $50. One person believes it is only worth $40 and he sells it. For that instant, the market price is $40. Now this new holder (it could just as easily have been one of the other existing stockholders, assuming they have the funds to invest, or the ability to borrow) has his own opinion as to the stock's worth. Perhaps he thinks it is worth $45. Let us say he finds a buyer willing to pay him his price and he sells. The market price at this instant is now $45. Remember too that the other shareholders that hold the stock believing it to be worth $50 can change their opinion too. Perhaps, one owner changes his appraisal and is willing to sell for $43. Let us suppose he finds a buyer. Now the price is $43. And on and on it goes.

One can imagine, with a stock trading millions of share per day and with literally millions of onlookers watching past transactions and putting bids of their own in the market, how much this price might move. The increments are typically small, but on certain days, perhaps due to new information, these prices can move significantly. Nonetheless, the process is the same. There must be buyers and sellers, and each are motivated by their own valuations, however arrived at.

This ought to dispel any notion that the market represents some sort of collective mind or social intelligence that exists apart from individual traders. To borrow once more from John Burr Williams: "Like a ghost in a haunted house, the notion of a soul possessing the market and sending it up or down, with a shrewdness uncanny and superhuman, keeps ever re-appearing." Since made from the stuff of mortal man, the market is equally prone to human folly. We can only speak of the market existing metaphorically.

The above discussion excludes monetary factors, of course. An increasing supply of money and credit serves as the rocket fuel to inflate the prices of stocks just as it does with other capital goods and all forms of investment. Stocks in essence are claims to a collection of resources employed in meeting the demands of consumers or other producers. As the new money weaves its way to buyers, these buyers bid up the prices of stocks.

As Mises has noted, "Very promptly these funds find outlets in the stock exchange or fixed investment. The notion that it is possible to pursue a credit expansion without making stock prices rise and fixed investment expand is absurd."

In the metallic money world of yesteryear, an increase in money and credit beyond that which was covered by specie was defined as inflation. Today, awash in fiat currency, inflation is often defined as a general increase in prices. This confuses cause and effect. The general increase in prices observed is the consequences of an increasing supply of money and credit.

An absence of observable price increases in the various price indexes does not necessarily mean that there is no inflation. It means that prices would be falling if not for the increase in money. Perhaps the best we can do to define inflation today is to say that inflation is any increase in money beyond that which would occur in a free market system (backed by specie), as elusive a concept as that is to measure.

Such inflationary increases in money and credit are clearly observable today. Easy money and easy credit were part and parcel of the 1990s boom.

William McChesney Martin, governor of the Fed from 1951-1970, famously described the Fed's role as taking away the punch bowl just when the party gets going. He neglected to mention that it was the Fed that provides the punch bowl in the first place.

The proliferation of credit has been truly staggering in some quarters. The government-sponsored enterprises are all large players in today's capital markets that are inflating credit and distorting the market process. It becomes difficult to separate what profits are attributable to inflationary gains. This creates the illusion of prosperity.

Even knowing that there is an inflationary environment does not alter the difficulty of separating real profits from illusory inflationary gains. The inflation does not affect all lines equally. To know ahead of time what prices will rise first, one will have to know what the value scales of buyers looks like before they become manifest in action. In other words, you would have to know ahead of time how the new money would be spent. All prices do not rise together or in the same proportions. The bottom line effect of all this is to make some assets appear more valuable than they really are.

© 2004 Christopher Mayer 
Editor, Capital & Crisis
www.capitalandcrisis.net
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Sol Palha
Tactical Investor
www.tacticalinvestor.com

Definition of Market Value or Market Insanity

Land is the only thing in the world that amounts to anything, for 'Tis the only thing in this world that lasts, Tis the only thing worth working for, worth fighting for -- worth dying for.
Margaret Mitchell 1900-1949, American Novelist

Having no real experience in the real estate appraisals business, this topic was rather challenging and even after attempting to read as much as I could on the subject, I still feel like a child trying to drive a car. So I have decided to attack this topic in areas that I feel competent enough to blurt out something. I will leave the very technical stuff to my esteemed colleagues.

I am going to put the Definition of Market Value that was kindly provided by Gale Bullock.

DEFINITION OF MARKET VALUE
(A fatally flawed definition…?)

A definition of market value as stated in the glossary of the most recent edition of the Uniform Standards of Professional Appraisal Practice is “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

1.Buyer and seller are typically motivated;

2.Both parties are well informed or well advised, and acting in what they consider their best interests;

3.A reasonable time is allowed for exposure in the open market;

4.Payment is made in terms of cash in United States dollars* or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

I will start my attack by looking at point number 4. The United States Dollar is no longer the same Dollar that existed before the Gold standard was abandoned. Hence one can unequivocally state that the definition of market value as it stands is a fatally flawed one.

The Central bankers have done away with real money and replaced it with a form of money that is not even fit to be called toilet paper. At least toilet paper has somewhat positive function that is far more than can be said for fiat money. Its only function is to take the little you have and replace it with nothing. There is a Silver lining; if one follows the Feds closely one can use this fiat to generate some real wealth. However this is a completely different topic and possibly something we can examine in the future.

Fiat money is only accepted because a whole generation has been dumbed down so much that they don’t know the difference between real and fiat money.  Hey most of them have a hard time telling the difference between credit and savings. To them a credit card is the equivalent of having money.

Well onto the main point. How can you sell valuable land for worthless dollars that are no longer backed up by Gold or Silver? For the Definition of market value to hold, we would have to back up every worthless dollar with Gold. A concept the bandits in charge are not likely or willing to embrace in the near future.

To sum it up basically the definition of market value as it stands should be scrapped and a new one put up. Where in bold letters it states that, when you sell your land you are no longer going to be paid in United States Dollars, but Federal Reserve Dollars that are completely worthless. And your now valuable land will be taken from you and replaced with this worthless paper to do as you see fit.

Another disturbing phenomenon is that real estate has no standard value.  One appraiser can come in and appraise it at a higher value then another who is really doing his job and not busy trying to pump up the value of the land. The reason for this discrepancy and fraud is due to the passing of the Fierrea Act. It has basically centralized the appraisal process and has put a bunch of imbeciles in charge. In simple words it stated that all Appraisers had to be State Licensed; the result was that an average Joe from the street was now on the same level with someone who had 10-20 years of experience.

So now you can get some guy who appraises your house for 50K more than it should. Lets say you house now is valued at 350K instead of 300K and you have mortgage of 200K.  You can now go out and take a loan of up to 125% of the value of your house. That means you can borrow up to 187.5K  (125% of 150K) and spend this money in whatever way you see fit. Now just imagine this being done several million times. A ton of money is being created from nowhere and this money slowly but surely indirectly ends up feeding the financial markets. So what you have is fraud being committed on level and a scale that is completely almost beyond imagination. Furthermore this fraud indirectly ends up pushing the financial markets even higher.

As far as point two goes I completely disagree with it; both parties are not well informed, and they definitely do not know what’s going. They have been systematically misinformed and lied to. They are only acting on information they think is true, because they trust their government and indirectly the Central Bankers. If they really understood what was going on, I don’t think they would be so eager to part with something that has value for something that is nothing but a joke and an illusion. The only thing they would be willing to accept for their land would be Gold, Silver or another piece of land in exchange.

What is a lie? It is to say what is real is not real. It is to deny the existence of what exists.
Peter Nivio Zarlenga  American Businessman, Founder of Blockbuster Videos

Conclusion

Every appraiser whether he has 0 years experience or 10 years experience is on the same level due to the Fierra act and so now we have a bunch of imbeciles over valuing properties. This overvaluation then creates a false sense of wealth and the consumer starts to think that investing in properties is a good business.  On the same note the consumer feels that he is richer and therefore can afford to spend more. This prompts him to borrow more money and so a vicious repetitive self-feeding cycle is created.

The worst atrocity committed here is that the US dollar is no longer the same dollar it was and so the definition of market value is completely invalid as it stands. Instead it should be called the Definition of insanity. Since worthless paper dollars are now able to buy something physical that has value and is in limited supply. Last time I looked one could not print or produce land, as can be so easily done with today’s American Peso. This problem is further aggravated by the fact that one really does not know what the true value of one’s or for that matter any ones property is: for the simple reason that the appraisal process is now centralized and experience counts for nothing.

Examination of the appraisal industry would require a separate essay. This whole problem has arisen due to the fact that the Gold standard was dropped and replaced with the paper standard. A lovely tree is chopped and then turned into paper; some ink is splashed on this paper, a stupid face printed on it and now its called money. The feds are the only ones who could take something useful and actually turn it into something useless.

I find it dull to end on sour note so I will give you an example of Silver lining to this whole fraudulent process. If one paid close attention to the Feds policies after the markets started to correct in 2000. One would have noticed that they were ready to take on an extremely accommodative stance towards interest rates.  One could have simply started buying houses as property markets thrive in a low interest environment (currently buying a house is not a smart move). In addition when they started to let the floodgates loose one could have also bought some bullion right towards the lows as soon as the very long term down trend line was violated.  Drawing trend lines is something everyone who decides to gamble in the markets should be familiar with. If not you have worsened your already bad odds of succeeding in the financial markets.  There are many more examples, but that would require a whole new separate article.

This is does not mean that I support the Feds views and actions; for the record I detest their actions. However no one ever made money screaming on the top of his or her lungs about wrong doings. Words are cheap actions are everything and when it comes to the Feds it pays to monitor their actions closely. Furthermore screaming and happiness don’t go hand in hand.

Insanity in individuals is something rare -- but in groups, parties, nations, and epochs it is the rule.
Friedrich Nietzsche 1844-1900, German Philosopher

© 2004 Sol Palha
www.tacticalinvestor.com
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Chris Sanders
Principal, SandersResearch.com
Buy others for news. Buy us for judgment.

The Question at Hand???   ....No Problem!

The question at hand is whether or not the definitions of market value used by USPAP or the Appraisal Institute are reasonable. Both seem admirably suited to what I assume is their purpose: to provide a sufficiently malleable definition so as to make it possible to justify however broad a range of potential prices as is necessary to ensure the consummation of a sale. For example, there is the qualifier in both definitions that both buyer and seller are “typically motivated.” It does not take much imagination to conjure a wide spectrum of “typical” motivations, ranging from just needing a roof over one’s head to laundering the proceeds of narcotics or arms trafficking. If you think that the latter is not a typical motivation, consider that in the mid-90s the Justice Department estimated that the annual flow of the profits of narcotics trafficking through the US banking system were on the order of $500 billion to $1 trillion per annum, then think again.

As one who has traded in markets for most of my professional life, the only sensible definition of market value seems to me to be the price at which something actually trades. Whether or not something is actually worth what it changes hands at is altogether another question bordering on the metaphysical. What one buyer will pay for a house or an ear of corn, an ounce of cocaine or a Uzi is a matter of his or her unique needs and preferences. Who is to say what the price of a piece of property should be worth? If I am in possession of $1 million in narcotics profits, and am otherwise in my “legitimate” business subject to a 40% marginal rate of tax, I might well welcome paying $1 million in cash for a property worth half that if by doing so I can then get my money into the banking system, no questions asked, turn the property around and take a tax loss against my legitimate income. This might qualify as “special or creative financing,” but I doubt it.

Freedom loving folk everywhere will find the restriction of sale to “US dollars or in terms of financial arrangements comparable thereto” abhorrent, given the unconstitutional, illiberal and monopolistic nature of the modern monetary system, but this is not, I think, sufficient cause to reject the inclusion of this clause in the definition at hand. After all, the intent therein is taking care of business, not protecting one’s liberty. Nearly a century on since the creation of the Federal Reserve, a strong case can be made that usage and custom have long since legitimated the use of fiat currency. Indeed, I would argue that the issue of fiat currency has been eclipsed by what we at Sanders Research call “meta-currency.” With meta-currency one does not even have the questionable comfort of holding a piece of paper that promises repayment in another piece of paper printed by the same monopolist. Meta currency exists as intangible strings of binomial electrical charges and can be created by anyone with the ability to pay off enough congressmen, as Fannie Mae, Freddie Mac, the Home Loan Banking System and HUD demonstrate every day.

The advent of meta-currency promises the ability to allow infinite leverage and to explore rates of taxation undreamt of in history. The only caveat is that everyone needs to use it. Since no one in their right mind would consider trading real things for nothing, this in turn imposes the requirement of repressive government to force them to do so. The definition of fair value under consideration here is not in the least inconsistent with this.

No problem.

© 2004 Chris Sanders
Principal, www.sandersresearch.com
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Tom Fryer
Realtor?

To the Inman News editor: 
The Bubble Babble Revisited - What is Strikingly Evident

Is all this bubble babble just gibber jabber? Does it go beyond a Dr. Seuss fairy tale, or Chicken Little saying, “the sky is falling, the sky is falling?” Those who dismiss the bubble argument, as a modern day fairy tale with limited risks to the American dream have grown carelessly unrealistic in their assessment of what is strikingly evident. So…what is strikingly evident?

What is strikingly evident is that millions of American’s are hooked on the most ferocious of the reality-avoiding addictions, the credit habit. This insatiable dependence has resulted in the largest accumulation of debt in the history of our country.  This is the disease-the swelling bubble is merely a symptom.

What is strikingly evident is that too many financiers have been quick and easy to provide accommodation and a short-term relief for the country’s burgeoning credit addiction. All financing segments of the economy have participated for short-term profits. Millions of consumers have fallen prey to all the wild credit pitches and unsound lending practices. This financial malpractice is the wrong prescription-the bulging bubble is a forewarning.

What is strikingly evident is the escalating social structuring of mortgages to homeowners who really cannot afford the high cost of homeownership. Everyone is entitled to homeownership but not everyone can afford the rising costs of utilities, taxes and home insurance, not to mention the increasing cost of home maintenance. This is unrealistic lending practices-the inflating bubble is only an omen of things to come.

What is strikingly evident is that many balloons coming due in the commercial real estate mortgage arena in the next few years may be classified as “troubled loans.” for they will no longer be able to be supported by fabricated values. Truth in lending takes on a new meaning. The financial fabric of these commercial balloons will soon begin to tear apart.

What is strikingly evident is that the money supply and monetary policy has been manipulated to support the “quick credit fix.”  The motivating impulse has been a methodically lowering of interest rates to refinance debt, but not to create wealth. Most of the real estate values are a fabrication, and not real wealth. This compromises the soundness of the credit system and the financial markets ---the bloated bubble can take only so much strain before it begins to rupture.

This entire hubbub about the bubble babble is more than hullabaloo. At what point does the economic and monetary system’s quick credit fix engines begin to sputter and backfire? At what period in the careless financial cycle will the creation of capital not be sufficient to satisfy all the ominous credit obligations? At what point does the bubble(s) burst, and like tremors of an earthquake, send shockwaves across the economy?

All the volatile ingredients are currently present for the bubble to burst. Current market conditions are deceiving. While most economic barometers show near normality on the surface, the fault lines lying beneath the financial markets are beginning to show movement.  Just an upward movement of interest rates with the interest groups not having any resources to refinance their debt will send the shockwaves across the financial markets and spew over into all sectors of the economy late in 2004 but surely in the first quarter 2005.

Can a change in monetary policy hold back the impending surge? We must be reminded of what the historians have already said about reckless money and credit expansion of the 1920’s. W.E. Woodward wrote, “No man, or group of men, can hold back the movement of collective social and economic forces.” Lawrence Reed said, “the economy was having a party, the Federal Reserve was spiking the punch, and a good time was had has by almost all. Few could read the handwriting on the wall.”

It is manifest that history tells us there will be a momentous consequence or a day of reckoning for almost a decade of financial greediness and credit overindulgence. This babble we constantly hear on the bubble will be the inevitability of property value decline, the inescapability of people going about their daily routines unruffled and unscathed by all the financial folly. One will not be able to retreat from its realities for the consequences will be much more than the sound of popping bubbles, a gurgle, or fizz. It goes much deeper, further, and wider than a bubble bounced around by easy credit terms and changing interest rates.

We have heard all the “shop worn” clichés on this day of reckoning. “The chickens will come home to roost, an economic house of cards, the handwriting is on the wall, what goes around, comes around, the domino effect, and a short-fused time bomb.  All these sayings may be trite and cute, but they are certainly fitting.

Does this commentary advocate doom and gloom? Not at all for the facts above simply recognize the objective truth. A truth that is so strikingly evident.

© 2004 Tom Fryer
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-- Posted Tuesday, 29 June 2004 | Digg This Article

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