Financial Sense: The 4Rs: Realty Reality Recommended Reading 01/07/2005

GLOBAL REAL ESTATE MARKETS FORUM
4Rs: Realty Reality Recommended Reading
with Editorial Comment

REALTY REALITY FSO ARCHIVES
January 6, 2005

See: http://www.lewrockwell.com/orig5/crispin4.html
for George Crispin's
Inflation Destroys the Fabric of Society

See: http://www.lewrockwell.com/orig/englund7.html
For Eric Englund's
Social Decay and the Federal Reserve

Ole Bear, Editor
Commentary and Case Study

2808 Biscayne Court [1978]

Monetary Destruction Case Study
-- 2808 Biscayne Court, Columbia, MO --
and the Myth of Appreciation

In 1978, two years after I entered the realty valuation gig here in Columbia, Missouri, $100,000 to $125,000 would buy you one of the finest homes in town in either Grasslands Addition or Lakeshore Estates, the two numero uno prestige locations in SW Columbia. I have antique MLS Sold Comparable books from these by-gone days. The most expensive SW Columbia sale from the second quarter MLS book was listed at $139,000 and actually sold for $123,000 closing 6/28/78.

The property is 2808 Biscayne Court [Lakeshore Estates]. It was 8 years old, a 2 story, 2,800sf above grade, 2 car garage, screen porch, had a cul de sac primo lot, nicely landscaped, and had 650sf finished in the basement. It had LR, DR, K, FR, Den, 5 bedrooms, and 2 1/2 baths, with the bonus ping pong room in the hole. Not just one brick fireplace -- Two! Here is currently what our Boone County Assessor has on file about this property in 2005:

Current Appraised

Current Assessed

Type

Land

Bldgs

Total

Type

Land

Bldgs

Total

33,400

216,300

249,700

6,346

41,097

47,443

Totals

33,400

216,300

249,700

Totals

6,346

41,097

47,443

Previous Year's Tax

Year

2004

Amount

$2,997.45

Residence Description

Year Built

1970 (Estimate)

Use

SINGLE FAMILY (101)

Basement

FULL(4)

Attic

NONE(1)

Bedrooms

Main Area

2,900

Full Bath

Finished Basement Area

768

Half Bath

Total Rooms

Total Square Feet

3,668

2808 Biscayne Court [2005]

Now given the fact that our Assessor is generally 10% to 15% mellow on market prices, let's add 15% to $249,700 and we get $287,155. The house is now 35 years old. Let's say it has an effective age of 18 years which is reasonable, and has a typical 60 year life. Depreciation is 1/60 or 1.66%/year. 18 x 1.66% is 30% physical depreciation, correct? Now, when it sold in '78 it was 8 years old. Let's assume then that it had an effective age of 4 years x 1.67% or 7%. In the 27 years since the 1978 sale at $123,000 [2005 - 1978 = 27], through upkeep, maintenance, replacing roofs, carpet, repainting, updating baths and kitchens, et cetera, the home lost 23%+- [30% - 7% = 23%] due to physical wear and tear. Not bad! And in that time it went up in market price from $123,000 to $287,000+-. New Math says it goes up in price $164,000/27 or $6,074 per year. $6,074/$123,000 gives us an appreciation rate of 4.95% or 5% per year. Not bad for a wasting asset, ehhh?

But let's look at what really happened here [assuming straight line depreciation]. You forgot about that 23% physical depreciation! Let's assume that the site and site improvements are now worth $60,000. $287,000 - $60,000 ='s $227,000 [depreciated value of the house]. If physical depreciation is a total of 30%, take $227,000/.70 to approximate the cost new. Bingo! $324,000! 30% of $324,000 is $97,200 in physical depreciation, right? $97,200/35 years is lost value at $2,777/year, right? OK, now let's get funky. What is the real appreciation rate [rate of currency destruction or inflation]?

In our 5% appreciation rate we gained $6,074 per year for the property appreciation, so let's add an additional $2,777/year for loss in value. $6,074 + $2,777 ='s $8,851/per year actual price gain! -- that the property actually inflated not offset by physical depreciation or wear and tear. Now take $8,851 divided by the 1978 sales price of $123,000 and do the New Math. How about 7.2% total appreciation per year [not offset by physical depreciation]? Guess what? -- this is outside most Folk's radar. And this is Missouri, not California or Florida!

This is what I mean when I say that real estate with a building improvement on it is a wasting physical asset -- the only thing is... with the destruction of our monetary system, no one really sees it -- all we see is that the property goes up in market price [not necessarily market value] -- and we are all led down the primrose path that real estate always goes up. While real estate is inflating in price, our money system is being destroyed. The inflating house can carry more debt load now than in 1978. Now isn't that a really neat trick! Mr. Greenspan is smiling like Machiavelli on that one, Folks! Read our linked essays above. One's brand new, one's a little dated, but they are both pretty good. Both refer to hyperinflation in the Weimar Republic.

The things you learn from 27-year old MLS Comp Books about central banking. Being a central banker with this kind of power, is pretty awesome, ain't it?

Editor's Note: The subject property location has had no adverse market influences, and has remained a very desirable, affordable, stable, appealing, and now well-established residential area, that still competes with all SW locations. In other words, all market forces are similar in 2005 and applicable to 1978 marketing conditions -- with the exception that interest rates for mortgages were generally in the 8-10% range, while in 2005 we are in the 5-6% range approximating 40-45 year lows. You could buy a new Cadillac for $12,000 to $14,000 in 1978. A new Caddy in 2005 is a $50,000 hit. Effective age is how old a house appears to be, regardless of actual age. A low effective age is kinda like a 40 year old lady who looks 25. A high effective age is kinda like a lady who looks 50, but she's really 35. The determination of effective age in relation to physical age is the basis for physical depreciation deduction in the Cost Approach, and becomes the basis for the age/condition adjustment in the Direct Sales Comparison or Market Approach to valuation.

Without knowing the effective age of the property, you can't appraise it. That's why drive by appraisals are a loaded gun pointed at realty appraiser's gonads -- those who perform drive by appraisals or AVMs from the desk!

Ole Bear, Editor
Columbia, Missouri

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