Valuing Housing

For all I've read about mortgages being under water and house values falling I find it odd how arbitrary house "values" are.

A house is nominally worth what people will pay for it. But the only way to find out what a house is really worth to someone is to sell it. Even then, you are only finding out what that house is worth to a single person (or family) in some limited fashion (timing and who offers/can pay the most). In a case like an appraisal the value of the house is also arbitrary but in a different fashion. Look at other houses, see sale prices, figure differences, attach dollar figure to differences, take temperature of market and determine if adjustment is needed...get number, say that is what the house is worth.

The case of selling demonstrates the value of the home to just the specific buyer and seller combination in a purchase that has more emotion involved than other buying/selling decisions. The case of appraisal demonstrates the value that some third party guesses for the house.

One of the major deciding factors for a home price is the monthly payment. People tend to pay what they can afford and what they can afford is a monthly payment, not the total price.

This is why things like the negative amortization ARMs were able to drive house prices up, they drove monthly payments down. Having more DINKs (dual income no kids) also drives housing price up because they have more income and can afford a higher monthly payment. The later, however, will produce sustainable higher prices so long as the fraction of two income families remains constant or increases (it cannot do sustained growth as at some point the DINC fraction would get saturated). The former is doomed to failure.

Still, it is the monthly payment that people can afford and not the whole house. As such, along with bizarre financing and more income things like taxes, interest rates, down payment requirements, all alter the "value" of a house. So my house is not worth $100k or $200k but worth what I can and will pay per month for it, whatever that works out too, all things considered.

Despite lots of advantages, I was still a little wary about buying when I did because interest rates were very low, which inflated prices. The housing tax credit also increased prices, though less than it is now since it was not available to everyone then. On the other hand prices were depressed and I did qualify for the (very stupid) tax credit.

I'll do work on my house over the years and that may make it worth more or less. But my house has no meaningful value until and unless I (try to) sell it. Granted this is not entirely true as my property taxes are based on an imaginary value, but that value is as much political as real and the numbers there are laughable.

One particular place where this imaginary number was made meaningful was with HELOCs (home equity lines of credit). All of a sudden people could get a lot of real money (debt) based on the imaginary value of their home, and many people took out up to 100% of the value. I think that HELOCs are not bad, but they should be capped at something reasonable (50-80% of the lower of mortgaged or appraised value).

Ok, this is getting rambling, and has been a draft too long. I'm posting. May revise/tear down later.