Value vanished into thin air...

A recent post by John Mulkey here on ActiveRain made the rather blunt point that the home value lost in this recession is NEVER, EVER coming back (see John's post). John explained that it has vanished into thin air and will never be recovered. He opined that, although prices will eventually start rising again; they are likely to rise at the historic rate of 3% a year, or about the rate of normal inflation. If that is true, then the increased price rise does not represent a true recovery of lost value, since one must adjust for inflation.

Many people commented on that post and most just didn't seem to get it. For many, if the price goes up a bit then the value also went up and that means that lost value was recovered. That just isn't true. Look at it this way. If a stock that I own drops in value 30% (a similar drop to home values in this area), that represents real loss of value. To make the example simple; if the stock was at $1 a share and I own 100 shares, then it was worth $100 just prior to the drop. Had I sold it before the drop, I could have bought goods worth $100 - let's say 20 pounds of coffee at $5/pound. After the drop my holding in that stock is worth $70. With that, I could only buy 14 pounds of coffee.

Now if I hold on to it for 10 years and it finally makes its way slowly back to the price it was at when the drop occurred, my 100 shares would again be worth $100. But what happened to the price of the goods that I could have bought 10 years ago. At an inflation rate of only 3% in the price of coffee over that time coffee would cost $6.62/pound and I could only buy 14.88 pounds, or about what I could buy today for my $70. So the price is back to the pre-bust level, but the value has hardly improved at all. The same thing applies to home values.

The "value" that was lost from homes in the real estate bust was a paper loss for most but a very real loss for those who actually bought during the run-up prior to the bust and for the investors who bought the securities (now there's an oxymoron for you to ponder) that were created by pooling mortgages. People who bought prior to 2000 are likely about at break even, that is their homes have a current value that is about the same as when they bought. They haven't made the big appreciation that they hoped for (and once had, on paper); but, they are not under water on their mortgages either (unless, of course, they got greedy and took equity out of the house during the boom). The people who bought mortgage-backed securities that went bad are just out in the cold, just like people who bought stock in "the old GM" before it went bankrupt. They got the shaft from investment people whom they probably trusted and got to see them troop up to Capital HIll to say, "Oops, my bad", before they returned to their mansions in the Hamptons.

And where did all of that value go? A good deal of the actual money that changed hands went to the developers and builders who were cranking out new homes as fast as they could, many of whom subsequently went bankrupt during the bust because they got greedy and overextended themselves to build even more homes. Some of it went into the well lined pockets of the cat-fat bankers and mortgage lenders and wall street operators who were busily packaging and selling off pools of mortgages and who scored outrageous bonuses prior to the meltdown, none of which will ever be recovered. Some went to the investors and layers of administration that are behind the mortgage lending process.

Much of the "value" that was lost was never real to begin with. That value was mainly in the inflated "market prices" of existing home stock and was the figment of some assessor's imagination or the fantasy of some well greased appraiser. Both of those groups ran prices and "values" up as quickly as the market wanted, with little restraint. Asking where all that value went is like asking where your shadow goes at night.

So, what does this all mean? It means that we all need to let go of the past, give up the thoughts, hopes or dreams that we can wait this out and that the lost value will come back and everything will be as it was before the crash. That's not going to happen. Get over it. Live with it. Get on with life..