Saturday, 24 March 2012

What's your house worth? Part 2: Attitude

At my BC truss plant, housing quotes fell off a cliff beginning August 2008 and mysteriously began to rise in February 2012.  Attitudes change, and with them, the price of your house. What's strange in our area (the Okanagan Valley)  is that few nice homes are built with mortgages and yet the number of housing permits fell to less than half during that period.  This attitude is tracked as the Consumer Confidence Index with questions about whether you are thinking of buying an appliance or taking a holiday in the next six months.  When it's high, your house sells in a week with competing bids.   When it's low, your house sits on the market for four months and has a "Reduced" or (slyly), "New Price" sign on the front lawn.   That confidence is like a ghost in the machine, hard to pin down.  People talk intensely when bargaining for a deal and then are unexpectedly chatting about the hockey game and you know the deal is done even if the meeting isn't. The sum of opinions of millions of Canadians is always on the move like a great flock of starlings, seething and swooshing, and the dollar you get for your house moves with them.

Attitude includes greed in delusional bubbles.  When I buy into the narrative that house prices can only go up, I make irrational choices out of greed.   How irrational?  Buying more than one house at a sky-high price with almost nothing down, borrowing against the increase of equity on paper to spend on vacations and a speedboat. Buying a house whose mortgage I cannot afford because I'm sure I can flip it for a nest egg.

Attitude includes credit which comes from "credo"  or "I believe".  Not just bankers take an interest in how believable you and your neighbours' beliefs about the future are.  When the coal mine at Tumbler Ridge was shut, there were deserted mine-owned houses everywhere that couldn't get a buyer for $30,000.  Now this:
"The housing crunch has officially arrived in Tumbler Ridge. Three to four bedroom furnished homes are now renting for $2,200 to $2,600 each month. Several homes have all available rooms rented to shift workers and out-of-town contractors"
The point is that the sames houses went from valuable to nearly worthless to valuable again as the believability of the town's future changed.

Attitude includes trust in community.  When trust is lost through extreme inflation or through predation and robbery by gangs or governments, people conceal their wealth.  Your house needs walls and alarms or guards to be saleable.  Houses that look wealthy on the outside lose value.  House transfers aren't registered at their true value.  Deals are done in cash and barter. The stats you read about the housing market will be false or unavailable.

Attitude is individual as anyone who ever tried to sell a house will know.  "I can't stand the bedroom carpet"  "It's all on one floor!"   "What a waste to have no basement!" "The living room windows get too much sun". "Those windows are perfect for solar heat in winter."  "What a darling chandelier." and so on.   Most individuals wouldn't pay 2/3 of your asking price but on average there is one person who will come close.

Replacement value is a good way to value a home but the attitude you and your community adopt can move the price more than the materials used to build the house.

Part 1 BASICS linked here.

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