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Do the Rich Default More on Mortgages than the Poor? Foreclosed Mansions at TigerHawk : The Problem of Homes Overpriced by the Real Estate Bubble

By Andis Kaulins

Are the rich defaulting more on mortgages than the poor?

See Foreclosed Mansions at TigerHawk, where Escort81 comments on a David Streitfeld article at New York Times titled Biggest Defaulters on Mortgages Are the Rich.

The housing bubble problem is epitomized at the New York Times article by a Peter DaSilva photograph of "a home in foreclosure in Los Altos, Calif., a city where the median home price is $1.5 million." [emphasis added by LawPundit]

During my sojourn at Stanford Law School we had a group of students who rent-shared a house - in Los Altos of all places - a house which according to Zillow is worth well over $1 million today.... Probably not too many students living in those Los Altos Hills these days.

The problem really seems to be that real estate housing is a market-overpriced investment object rather than just a place to live, and this investment nature of housing over the years has driven up prices to levels which are often many multiples of their real worth.

The right way to actually "price" residential homes would be to divide up the cost elements as follows:

1) to list separately the lot price of the land property at a given location (i.e. what the lot would be worth if no house stood on the land property at that location), and,

2) to list separately the price of the physical home itself at current prices - and compare that price to replacement cost, i.e. what would it cost today to rebuild the home from scratch as it is today, minus depreciation of course if it is not a new house

For many locations the underlying lot price is by far the greater percentage of the total "home price". This explains why many so-called "multi-million-dollar" homes are quite ordinary structures whose price is so high only because of their inflated location cost.

When one looks at the homes around Stanford in exclusive residential areas such as Los Altos Hills or Atherton, one quickly realizes that these home prices are greatly inflated due to their location and also because these real estate properties are used by some as investment objects. Most of the physical facilities of the homes are not worth anywhere near prices that are being asked for the property, whose "value" is determined solely by the price that someone is willing to pay for any given real estate object at a given location. If real estate agents would price properties separately according to lot value AND house value, many homes in exclusive residential areas would be viewed quite differently than they are.

Full post as published by LawPundit on July 22, 2010 (boomark / email).