Sarbanes Oxley brought us the mark-to-market asset valuation rule. This means that the current value of a traded asset, as set by daily stock market share prices or indexes is the determining market value of a specific traded security held by an individual or entity.

Does market-to-market automatically mean a non-traded asset, such as real estate, should be valued in the same way?  In a pure “value snapshot” corporate accounting maybe, but even this is a stretch as the replacement value may not be covered by current market value, especially in a down market.  Also does this mean we ignore the reason for this asset acquisition, value and the future!

Real estate is bought for the long term and seldom as a trading asset unless trading real estate is the business at hand. Land aggregators, entitlement companies and wholesalers buy and trade land but this is not a majority strategy, especially when applied to residential property.

Ninety eight percent of all real estate purchases are buy and hold.

The average of all residential holding periods is five to seven years, feasibly bridging most market pauses on downturns. Hence the lore that time heals most real estate mistakes.

With the current lending and bank credibility crisis, the discussion is how we evaluate real estate for the purposes of a quick trade? Mark-to-market applies in preparing for quick liquidation for the purposes of cleaning up the books, or mark-to-model to arrive at the real value reflecting acquisition purpose and real hold periods? This is especially true of a family home purchase decision.

Bank residential valuations and current appraisals are only meaningful for securities filings, bank regulatory filings and annual reports and just maybe for the 8% of all residential real estate that is likely to be in the market over the next twelve months. But not for the rest of us, homeowners and investors who are on no need of selling. We should not care.

The “we told you so” headlines from liberal think tanks like CEPR celebrate the fact that American families have lost nearly $6 trillion in housing value. This claim only works if they use the equally agenda driven S&P/Case Shiller housing hedge fund trading index. (See Personal Real Estate Investor Magazine Jan-Feb 09 for S&P/Case Shiller expose).

Newsflash – 92% of the folks that own homes are that are not being lost to foreclosure or being sold over the next 12 months make mark-to-market valuations irrelevant.  If you spread the expected sales rate of this residential housing stick at five percent a year over the next 20 years, it not only will have returned to peak market values (estimated at four years,) and accrue a the historic four to five percent we have experienced since 1929. Mark-to-model applies and the $6 trillion in supposed losses changes rapidly to a positive number.

We are guilty of using the same generalizations and averaging to get to a round assumption, but that is what these indexes and reports do to get to their self-serving pronouncements.

Real estate is local and your wise purchase in your neighborhood may have undergone a minor and in some case no price correction. In every bad real estate story, there is always a silver lining. 

Www.PersonalRealEstateInvestorMag.com.