My husband and I are in the midst of the great adventure called refinancing. Strictly running the numbers, it’s a good deal for us. We are going to drop from an interest rate of 6.25% to 4.00% and can recoup our closing costs in ten months. After we recoup our outlay, we will have a very reasonable monthly mortgage — insurance against future financial calamity and a chance to pay off the loan in the next fifteen years if that calamity never strikes our household. (That will mean we can then quickly roll from paying a mortgage to paying college tuition for our boys!) It’s also a feel good decision as we are leaving a big name bank, JPMorgan Chase, for a local credit union.
This is all routine: a process being engaged by countless households across our country each year. But that doesn’t mean it isn’t, in many aspects, absurd: though perhaps that’s only my perspective. I am confident that at a minimum, the nature of our housing market reveals some fascinating aspects of our cultural story.
It’s been quite interesting, for example, to find out that JPMorgan Chase doesn’t really want us because we actually pay on time and they can’t get a return on late fees. Or that our new lender, even despite what I thought was now an obvious fact in America that a life lived on credit isn’t sustainable, advocated rolling in closing costs because “the cost of credit is so cheap these days and think what you can do with the cash instead.”
It was also amusing to note that JPMorgan Chase wanted to refinance us under the government’s Home Affordable Refinance Program (HARP) simply because our loan had at one time been backed by Freddie Mac or Fannie Mae and not because our mortgage was underwater or we were struggling to make payments — in short, we were not in the group of Americans that HARP was designed to assist. In fact, given the interest rate JPMorgan Chase was offering and the required points, their intention seemed not philanthropic, but mercenary. Further, it was interesting that HARP didn’t require a home appraisal or extensive credit check. Hmmmm. But amidst all these tidbits, nothing was more fascinating to me than the home appraisal.
In due time our new lender sent out an appraisal expert. Nice guy. Young kids of his own so he understood why we decided not to replace our carpets just yet. I had cleaned our home from baseboards to ceiling, cleaned the front porch and tidied up the yard too — no small feat around here, remember the kids? Fresh flowers in every room. A nice aroma of morning coffee: he declined. At the end of the inspection I handed him my list of home improvements: new roof; installation of header beam where a load-bearing wall had been removed by previous tenants; new hardwood floors in two rooms, including replacing floor joists, bracing the foundation and installing a sump pump; rewiring of entire house and garage; new water heater, water pipes, attic fan, HVAC and woodstove.
He asked me if there was anything else, and I offered that in addition to city water the property has a working well which had a new pump engine and was recently re-plumbed. I also indicated that anyone moving in would benefit from the earth work we’ve done turning lawn into farm. He almost laughed and said: “The bank doesn’t care about that.” And that, to me, is where it all started to get weird.
Back in the 1920s when our home was first constructed, the well on the property provided water for many households in the neighborhood. Water. That substance on which all life depends. The substance humans can’t go without for more than three days. Water.
Now I am aware of an idea from economics, first articulated by Smith, called the paradox of value, also known by its best example as the diamond-water paradox. In this paradox we see the apparent contradiction that while water is more essential to our survival than diamonds, diamonds command a higher market price. Smith’s general idea was that value is a two-fold assessment: we can talk about use value or exchange value. Often something that has the greatest use value has little or no exchange value.
This paradox was solved first by Turgot with his idea of subjective value, which says that value is in the eye of the beholder. It later morphed into a concept called marginal utility, which says that indeed value does not derive from a good’s inherent production costs, nor from its usefulness, but rather, flows from the most important use a person has for the good relative to the number of units of that good that are available to that person.
Think about it like this. I possess four gallons of water. As we’ve discussed, humans need water to survive, so that first gallon is mighty important. But once my thirst is slacked, I can look around me and consider other uses for the remaining water. Likely I will put away the second gallon for my future thirst, so that unit is still fairly valuable. The third unit I may use to water my vegetables. Food is important, but not as much as water, so again, the third unit has value, but it’s lower than that of the first and second units. The fourth unit I can use to water the flowers. Beauty matters, yes, but not as much as breathing, so that fourth unit costs the least. When I have all four units, the value is equivalent to my use for the fourth gallon: beauty. But if my kids decide to have a water fight and spill out three gallons, then the value of a unit skyrockets for me, because now it’s equivalent to my use for that first gallon: survival.
So I sort of understand why “the bank doesn’t care about that,” but grasping something intellectually and grappling with it in the living are two different things. I began to wonder if I was alone in questioning why single detached-home appraisals don’t list “arable land” and “working well” as amenities. But maybe the local food movement simply hadn’t grown large enough yet to affect an appraiser’s checklist. I began to wonder then if this peculiarity was unique only to our modern way of life. Surely I thought, at the turn of the 20th Century, a working well trumped a master bedroom or 6.25 bathrooms per bedroom.
My query led me to a thesis written by Sandy Isenstadt in the College of Architecture at the University of Kentucky titled The Visual Commodification of Landscape in the Real Estate Appraisal Industry, 1900-1992. The thesis examines the development of a property’s view as first an amenity that contributes to the value of the home commodity; and then to a taxable asset. While the diamond-water paradox prepares me to learn that view is more valuable than a working well, and I’m always prepared to learn something new has been taxed, what I found of greater interest in the thesis was its examination of the historical context of appraisals.
It turns out that it was only in 1932 that the American Institute of Real Estate Appraisers (now called The Appraisal Institute) was formed with its society created in 1935 when the U.S. Building and Loan League resolved sponsorship (1). Early publications and trade manuals articulated the profession’s main task as “establishment of a measure of value” and were quick to validate the long-standing difficulties identified by economists in the “science” of establishing value. Further, from the beginning, appraisal of the detached single-family home was problematic:
“Of all the various types of property, detached single-family houses were the most troublesome. One reason is that they were assessed by ‘indirect’ means. Direct indicators of value included revenue streams from goods produced on site, but a primary attraction of the residential suburb was that it had nothing to do with productivity per se. Instead, to evaluate one property, appraisers had to look at other properties. Worse, these other properties were determined less by comparability than by the simple fact that they had recently changed hands. Hardly scientific, this process was accepted by default; various commissions in the 1920s agreed that the value of residential real estate was ‘more or less’ ascertainable in the market and, in any case, no more precise method could be found . . . . Appraising detached houses was [also] difficult for another reason: the people who bought them. Individual properties were bought by individuals, which meant that market data were finally corrected by somebody’s idiosyncrasies. In other words, volatile subjective values overruled calculations of worth” (2).
So what do I find so absurd in all this? A couple of things.
First, I have to say that I find it sad that our shelters and attendant property are not perceived as having the potential for productivity. Our 43,560 square feet definitely produce water and food, not only for us, but for a whole host of creatures; I’m pretty sure too that the trees on our lot are producing oxygen. And this land produces another very important commodity for me: space, literally somewhere to put my feet. When did these basic needs lose their appeal? When did we stop seeing the land we own as intrinsic to our survival? It troubles me that our society employs a system of ascertaining value that ignores these key markers of necessity, instead choosing to focus on material items, what I would call fluff.
Second, I am stumped as to why decades later we’re still forking over $400 for a meaningless assessment. (And why in the name of God and Goddess did I clean house for it?) If in the end what matters is the value assigned by the individual who buys my house, why should I go through an appraisal unless as a form of arbitration between me and a buyer? Yes, I understand, lenders need to know the “value” of the property they are taking on. But if they truly care about making wise investments, then shouldn’t they use a wiser assessment tool?
Namely I’d suggest that what matters, particularly in a refinance, isn’t the price that other homes are selling for in a one-mile radius, but rather whether the borrower has demonstrated themselves to be a good caretaker of the property and the lien on it. Further, if we longitudinally examine housing prices, as was done in a post at a blog titled Observations, “The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2010 was only 0.2%/year after inflation!” (3). Given this, shouldn’t the bank determine my property’s value by an aggregate formula that considers care and condition of the property in the context of average home prices over a very long period of time, inflation adjusted? Wouldn’t this formula have helped avert the over-appraisal of homes that contributed to the current housing crisis?
But I am not an economist, nor a financial guru of any kind. So I trust the fallacies in my thinking will be glaring to both parties. What I can articulate with certainty is this: because of an appraisal that didn’t in any way assess anything we find important about our home, or that we feel potential buyers will find important, our home lost $28,000 in value overnight, relative to an appraisal we did in 2009 for a qualifying assumption. The driving factor in the value reduction was comparables. Never mind that I could find alternate comps that would have raised the value of our home; we didn’t fight the decision. Frankly we find this all hilarious. How can we place any emotional stock in an assessment that is so arbitrary as to be meaningless?
In the end, the important thing, the practical liberty piece, is that we have never and will never view our home as an investment so we are free to laugh at the assessment. We originally entered a mortgage we could afford and could expect to continue to afford, so refinance or not, we still are going to have a place to call home. And further, I suspect that I will personally continue to feel that my home is increasingly valuable because every unit of energy that I pour into this space reaps great personal returns for me and my family.
Perhaps someday The Appraisal Institute and the lending industry will figure out how to account for all of these nuances. But I’m not holding my breath. They’re simply coming at it from a totally different space than me. I will always need a place to put my feet, and because this property remains for me a single unit to meet that need, I will always value it more highly than the banker for whom this is but a single unit in a sea of units, each with a diminishing value in his eyes. For me, this will always be a home; for the banker or the appraiser, it’s but a commodity.
The best we can hope for is the certainty that we love our 43,560, that we care for it and it cares for us; and that with luck and diligence, we will someday own the property outright. Should we sell before then, we’ll have to gamble that another individual human who shares our assessment of the property will make an offer that reflects this value, and that they will have the resources to back their offer.
© Jennifer S. and harvestliberty.net, 2012.
(1) via Appraisal Institute – About Us.