In today's housing market, we have yet to understand the value of homes as they are today. With the downturn in home prices, we have yet to see a stabilization or an equilibrium in the prices themselves. It is the intent of the author to formalize a value (intrinsically) of a home anywhere and anytime. Whether or not this is possible, it is my sincere hope that through an understanding of the complexities of arriving at a number that a person will be able to grasp the nature of the problem.
The first step in arriving at a price of a home is to consider the cost of the home. If a home was bought buy a buyer and the seller has transferred the title to said buyer, it is a sale. It is this sale which will give us the purchase price of the home. However, many people do not have the full cash outlay to purchase the home. It is through the services of a bank or other financial institution who will lend money to buy the home. Since their is a third party involved, a sale has not occurred yet. I mean, a sale has occurred but not in the usual sense. Having a third party involved in the buy-sell process, there has not been a transfer of title. The presence of a lender as a lienholder must be taken in account for the cost of the home. After all payments of principal plus interest, we can come to the full purchase price of the home.
Most of the time, when we buy a home, it will be our primary residence. If we can't afford it, then we have to just rent it from others. Whether we rent or buy, that residence will have a purchase price attached to it. The reason for that price is the underlying reason why there is a value to the home-the ones who reside there. If the home was not rented or is vacant, the value of the home will not be there. Only until there is a resident will there be value. If not, then, there should not be a value at all to the home. That means $0. Wait, didn't someone buy the home? True, someone did buy it but the purchase involves a seller and a buyer. And that was some time ago. The problem is where the value is after the purchase. In the stock market, every security is purchased and sold each and everyday. We can find the true price of that stock by simply looking it up. It is not that easy with homes. The recent downturn in the housing market has taught us that home prices do not always go up. After every purchase, taxes must be paid on the home. Yet, it is recuperated through interest deductions if a loan has been made. Even without that loan, the taxes on the home must be recuperated. The simplest way is increasing the cost of the home by a % equaling the property tax.
With that, we come to the second step in finding the value of the home. Taking the cost and adding all taxes plus interest we have come to a modified value. Wait, wasn't the value $0 if no one was living in the home. If no one is living in it, then its hard to come to a true price for that home. For a foreclosure, no one is living in it. It is deserted and empty. The bank just carries a value for its books because they have to keep things in balance: a loan for something of value. That value is not the cost of the home. It is what is owed to them as part of their business. The longer it is on their books, the higher the balance will be through the taxes and charges against it. The bank or lienholder now becomes the buyer for that home. Since the bank did not negotiate on the price of that home, its role as a buyer is complete.
If the bank now owns that home, why is the value $0? It's due to the fact that no one is living in it. Period. A price is negotiated to come into a buy-sell exchange. Just because the bank owns it doesn't mean that there is no value. The value at present is $0 until a price is negotiated with the bank by a buyer. That buyer will know some details about the home itself. When it comes to a price, the market itself determines it. In a vacuum, there is no number at all. By opening it up, the scene becomes clearer and a glimpse of what its price can be will be seen. This is the so called "location effect". This effect encompasses comparable sales and neighborhood appeal.
The best comparables are homes which are not empty and have people residing in those homes. Be it through a purchase or a rent agreement, the true value of a home becomes more apparent. We have already gone over the cost plus interest and taxes. For a renter, we just use the rental price itself. If the rent is $500 a month and times it by 12, we have $6000. So what? That yearly sum can be compared against interest charges PLUS taxes. We take that figure then times it by 30. Then doubling it, we can come to a rough estimate of a home price for that home.
That is all the time I have for now.
