Stress testing banks

[dewdrop]

Media reports suggest more bad news on the way. What puzzles me is what valuation can be placed on property for this exercise if, in effect, there is no market there to guide values. For example the park where i live has been a much sought after place to live and in the past rarely a house went on the market as it was snapped up once news went out it was for sale. For past two years or so a house has been for sale and i gather there has been no offers. How can this property be valued?

 

[Chris]

I don't think you can value a banks underlying mortgage securities by looking at all the individual properties. The only thing that makes sense is to discount the entire real estate portfolio by the decrease in house prices since the peak. In addition to that you would have to factor in the very likely further decrease, plus the effects of repossessions.
But looking at past "stress" tests of banks I would have no faith in their findings.

 

[csirl]

There is still a market in a lot of places in the country. In my area, houses are being bought and sold on a regular basis. Prices are a lot lower than before and sometimes the houses are on the market for longer than before, but they are changing hands.

 

[Chris]

Yes, there is a market clearing price for everything, no matter how bad a recession/depression is. We sold our house 3 years ago. At the time there were 5 other identical houses in our estate for sale. We undercut them all by a lot and sold the house within 2 months.
A house near where we live now sold recently within 6 weeks of going on the market. The seller did the same thing as we did by advertising it for 20% less than comparable houses on the market. At the right price there is a buyer for everything.