Randy_H

BofA, Wells Fargo: No Equity After Accounting for Bad Loans

On Mar 05 12:33 PM Chris B wrote:

> But continuing the analogy, if the fire sale price that I could sell
> my house for in 1 day is $20k, but I could put it on the market and
> sell it within 6 mos for $150k, and perhaps 1 year for $180k, what's
> the house actually worth? To me, it's $150-180k, because I have
> no intention of giving it away at a fire sale.

What passes for financial "wisdom" these days is astounding.

a) If your house is "worth" anywhere near $150K, then it will surely sell for more than $20K in a reasonably short time.

b) For an illiquid asset, 1 day is not a reasonably short time. Houses cannot, as a general rule, be sold in 1 day due to transaction frictions. A reasonably short period for selling residential real estate is 30-45 days.

c) I'm happy that you have no intention of "giving away" your house. That's irrelevant to the market price except insofar as it shows sticky price phenomenon. The idea is that you may change your mind, or have your mind changed for you by circumstances. In that case, what is your house worth? The best laid plans don't always materialize regardless of your vigor in stating your case. If I'm loaning you money or otherwise capitalizing your sitting there in your home office typing Seeking Alpha advice, then I want to know what your home is really worth as dictated by the market, not by your wishes for the future.

Your comment adds further evidence to my thesis that there are very few honest, free market participants in our supposed free market capitalism. Rather, people only embrace the free market when they're winning, and suddenly want to resort to rule changes when they are losing. (And don't start with arguments about when the FAS rules changed on MtM; fair value accounting has been a known factor for a long time prior for other reasons.)