It Started, and Should End, with Real Estate

If the government bails out banks, it also better put aside money for structural reform that ensures the proper valuation of property. According to Elena Panaritis, a housing market driven by speculation catalyzed the recession in the first place.

"Think about when you buy a new or used car: no lender requires title insurance. Why not? Because there's no doubt about the car's provenance and ownership. US homeowners, though, are required to purchase this insurance to indemnify themselves against loss if the title is defective. Every time a house changes hands, there again are the surveyors out to check the property lines for the umpteenth time so title insurance can be written.

How, then, did today's crisis unfold? Incorrectly valued mortgages became speculative financial instruments for trading, which makes it possible to drive prices up or down seemingly without limit. And, as they traded downwards, they of course took the price of real estate down with them. Meanwhile, lending banks went over, the precipice of insolvency because the liquidity on which they depend dried up, all because their asset-backed securities have little or no value or even negative value.

Remember, a mortgage is called a 'security' because it is secured with a tangible asset. But if its value isn't real, it can't really be secure. That's the starting point for a toxic mix. Throw in excess liquidity (from 2000 to 2006) and housing demand, misvaluations and subprime mortgages to an already overstretched housing and real estate market, and it begins to be deadly unstabilising. Price becomes dependent on speculation, rather than on the actual value of the home and land."

Full Story: The property rights problem



Strange Analysis

There are lots of tidbits here, but I don't really follow a logical flow to the argument. One thing I gather is the author thinks title insurance should be eliminated. On that, I don't necessarily disagree. The US is maybe the only country who relies on it. I've always thought it was kind of a scam.

In terms of valuation, the next leap of the article, I think the author gets it wrong. First of all, the value of something is whatever someone else will pay you for it at the time. You can even blame appraisers, but it's not their fault John and Jill Jones looked at all the recent Sacramento comps in 2005 at $325,000 and still bid up to $390,000 to get the house. That wasn't a lack of information problem, it was a creative financing problem. As for the part about mortgages being securities, I thought that was weak. Well, it isn't really a security, as we define it in the US. It only becomes one after it gets pooled with other mortgages and then re-partitioned into classes. In summary, our house price "problem" is not the fault of title insurance and eliminating it won't ever create some "objective" value for real estate.

Property Rights Problem?

TO: The Guardian

This a ghastly rationale for a problem caused by the unregulated and incomprehensible world of structured finance and blaming property rights & property level valuations for the scandal is a little like blaming Jack the Ripper’s rampage on the knife. We are in a downward de-leveraging due to the fraudulent, unregulated market for CDO’s which are Wall Street/math geek instruments containing pools of mortgage backed securities and which, incidentally, are different from asset back securities which create liquidity for most consumer purchases like autos. The debt swaps, and a more apt title would be insurance contracts, which promoters and brokers bought & sold with utter irrational exuberance created an unregulated Molotov cocktail which has exploded in our faces. The mixing and matching of good mortgages with toxic ones, the unwillingness of promoters to even distinguish between toxic and good, and the criminal inability of the bond raters, not the property appraisers, to accurately and honestly value these instruments has created the current catastrophe. This is about debt securitization, not property rights.

By the way, the next time you offer an article promoting the socialization of all property rights, it would boost your credibility if the screed were written by someone who actually knows what the hell they’re talking about.

Ray Lauletti
Developer & Consultant

Blaming Speculators

Blaming speculators is one of the most economically illiterate things one can do; it's akin to blaming the symptoms instead of the disease. The real estate bubble was first and foremost casued by the federal reserve's easy monetary policy in the aftermath of 9/11 and the tech bust (actually it goes back further than that, but those times were the specific catalyst for the real estate bubble). The fed actually set interest rates in negative territory (including inflation, borrowing money was essentially free), people used free debt to bid up real estate prices (the new "safe" investment after tech stock imploded), banks made loans against the ever increasing valuations, a bubble set in, borrowers and lenders threw caution (and ethics) to the wind to cash in on the "new economy" and the dance continued until some folks finally realized that it was unsustainable (and the house of cards has come crashing down... taking everything else with it as well). Speculators are simply a sidenote trying to cash in on the rising prices. While admittedly, they do move prices, they do not set the underlying rules of the game and are merely a symptom of the disease of easy credit. Blaming speculators for price increases is the easiest way to remove blame from oneself for one's bad decision making (akin to CEOs blaming short sellers for stck price declines when the CEOs business practices are the real disease.... Ken Lay used to do it all the time, it's not Enron, it's those darn speculators).

The authtor's rant against title insurance and title companies is particularly peculiar. Title companies evolved in the US to ensure that when you buy real estate, you are the actual owner of that real esate (and that the other party has clear claim to sell you that real estate). The clear ownership of real estate turns that property into capital (and the subsequent ability of the owner to use that capital to secure debt, be indentified by the authorities as the responsible party to pay taxes, pay for untilities, etc.). The recording of real property and clear chain of title to that property are actually very underappreciated aspects of the success of the western world and the failures of capitalism in the thrid world (see Hernando de Soto's "The Mystery of Capital" for that take). Anyhow, I am sure other western countries have a similiar system that works just as well (Europe and Canada anyways). However, the system really has nothing to do with valuations and everything to do with recording and responsibility.

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