Wealth in property in comparison to income opportunity is a contemporary issue in both developed, transitional, and distressed property markets. Today, I note for your consideration two examples that illustrate the daunting task of finding a solution through the application of “Reality Check Analysis” as you have outlined in your book, Prosperity Unbound.

In the first example, consider the case of the United States real estate markets, as they have been going through a “market correction” due to what has been referred to as the “real estate valuation bubble” occurring since the “high technology sector bubble” burst in the early years of this decade. Not only did investment dollars flow into the real estate markets from private and institutional investors, but also citizens were involved in the speculative real estate bubble because home ownership is a primary means of individual investment.

The Washington Post ran an in depth series on the collapse of the secondary mortgage market. Please see this link for that series of articles.

http://www.washingtonpost.com/wp-srv/business/creditcrisis/

One comment was made on the Washington Post blog from June 16, 2008 related to this series by a renter in Alexandria, Virginia, who noted that the real estate valuation bubble had effectively put home ownership out of reach of many renters in the DC area simply because of the “unreal” price escalations of properties that made even a well employed person unable to purchase despite the availability of secondary mortgages. Even so, the monthly payments couldn’t be met by a renter. Therefore, this renter commented that bursting the real estate bubble such that home prices have fallen to more realistic levels is a good thing for renters. Also, this commenter was not sympathetic to using tax dollars to “bail out” people who obtained mortgages they really couldn’t afford, because many renters not only were priced out of the market for property due to the high values, but it was offensive to this renter to also have to pay through the use of taxes for “unreal” property valuations that were driven up by investors, speculators, and over-extended homeowners. This “double whammy” hit on low- to mid- income renters is a particularly hard pill to swallow, and the commenter felt no sympathy to those who priced the renter out of the opportunity to own property and at the same time forced the renter into ceding income to the landlord instead of to the renter’s own wealth creation.

Elena, does “Reality Check Analysis” provide a framework to keep the markets grounded to the realities of social good and prosperity – rather than the speculative nature of greed due to unchecked and “unreal” market anomalies, such as the “unreal” housing valuations that proliferated with the expansion of the housing bubble – resulting in homeowners who had “unreal”istic concepts of the value of their home purchases in the market and the related expectations about the future value of those properties, as well as “unreal”istic expectations regarding their ability to fulfill their mortgage payment obligations?

For example, some mortgages were sold solely on the basis of the expected property valuation, rather than on the mortgagee’s ability to generate the income to meet the payment schedule within a “real”istic risk profile related to their income stability or access to alternative capital (e.g., savings). Worse, predatory mortgage practices and sparse oversight of state-based banks and secondary mortgage lenders, as opposed to the higher level of oversight of the large federal banks and large institutional secondary mortgage backers (e.g., Freddie Mac), did not have a “reality check” by formal market mechanisms, resulting in not only a high risk to mortgagers and mortgagees, but also to the world-wide market investors in the resale of these mortgages who had little ability or inclination to dig into the risk profiles of individual mortgages and understand the fragility of the secondary mortgage investments as a whole. Even worse, it has come to light that many members of the US Federal Reserve did not comprehend the nature of the risk profile of the secondary market as it relates to the efficacy of Federal Reserve interest rate leverage on protecting the stability of the US and foreign economies.

What this commenter to the Post blog noted, was that essentially the needed “reality check” was really only analyzed by individuals acting on their own to restrain their housing purchases and exercising their own restraint and informed judgment to resist the speculative urgings of the nefarious practices of secondary mortgage marketers and refuse to place themselves in a position of high risk. The unfortunate result, however, is that these responsible and adequately risk averse renters were excluded from the market due to the “unreal” estate skyrocketing housing valuations and limited to renting and making their landlord more wealthy and facilitating the landlords accumulation of capital.

Is “Reality Check Analysis” applicable to even developed countries like the United States given the housing bubble debacle? As such, can Panel Group offer services to apply “Reality Check Analysis” to federal, state, and local property market formalization to prevent market anomalies due to informalities such as lack of adequate oversight of lending practices by non-traditional and newly forming financial companies, such as secondary mortgage lenders?

Would you please comment on the nature of the informalities that have revealed themselves in the US housing bubble, and comment on how social entrepreneurship relating to “doing well by doing good” can prevent nefarious practices and greed from infiltrating the property markets and promote increased wealth that is sustainable and that accrues to the homeowners rather than to the speculators?

Looking forward to your response and insight,
Deanne R. Upson
http://www.CO2nscious.com

Having seen the book go from draft to final publication, I am really excited about what could come out of this blog. There are a number of themes that could be of interest. For example, managing risks that come from these different types of markets (real and unreal) including the types of tools needed to manage risks depending on what proportion of the market in a given city or neighbourhood falls in the “real” or “unreal” category. What is the benefit structure from the potentially significant payoffs that come from broadeing access to titles and registration and to institutions in general? Several players would benefit from and could contribute to such a topic. Are you going to be sponsoring specific conversations on such issues? It would be great to see how and where the principles of the book are now being applied.

Best regards

Frannie
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Dear Frannie,

Thank you very much for your contribution and the focus you bring to the discussion. Indeed you have seen the production of this book from the earliest stages. More importantly you have witnessed the development of the ideas presented in the book since the beginning of the nineties.

Some of the themes you suggest are very much in order as they go hand in hand with the sustainable transformation of “Unreal” to Real. I welcome and will sponsor specific conversations. Why not start with a topic you brought up that of risk management.

The debate on how to manage risk in markets festered with “Unreal” estate is a major one and rather current. I touch on this in chapter 3 and 5. Risk is measured with different tools when a country has a robust formal market and thus the majority of its property market is recorded on a secure property rights system. In such case property values are less distorted (because relative prices are less distorted). The risk evaluation tools used are mainly based on a straightforward cash flow analysis of the asset in question or usual credit ratings.

These tools however are not effectively applicable in a market that is more than 50% festered with “Unreal” property. They can be misleading and even dangerous. What should be used in such cases are methods accepted by the community and almost all based on reputation.

The financial and economic fragility of a market is very much related to the percentage share of “Unreal” estate. Thus the effort to transform it is crucial. It is not simple titling or registration but that of establishing a robust system that emits and enforces property rights. The key to this is to agree on the definition and the implementation method of this “system”. It is this type of challenge that urged me in writing Prosperity Unbound.

The players that should be involved in the transformation should be visionary investors, government decision makers (and policy makers), and the owners/citizens. I have come across some visionary private sector leaders as well as government leaders – the challenge is to bring all players together. I would extend an invitation to all three players to present their views.

It is exciting to see your blog. Your book and the ideas therein are seeds of information and knowledge that need to be spread around and this is probably the best way to do it.
Though the rules of engagement and the reference framework for an implementation may vary across the world, the supporting pillars of building trust and empowerment through choices and not dictates is the way to elicit community support and participation.
All the best to you and your efforts in starting a movement for such awareness and spread of information and knowledge.

Regards,

Pravin

Pravin,

It is exciting to read your contribution. Indeed, learning how to build trust, and empowerment through choices is the maker or breaker of sustainable change.
I hope you will continue to be in dialogue with us and keep up with the momentum just created.

Cheers
Elena

Congratulations on the book and the blog initiative. It’s absolutely great to see social media being used productively and for a real purpose. Although I don’t think I can participate much myself – it is so far away from my area of expertise – I am certainly looking forward to reading new posts and learning more.

-Alexandros Poulos

Alexandre

Your inputs are encouraging. I would be delighted to see this forum become a real dialogue on how to make sure we can transform “poverty” trapped in what I call “Unreal” estate. You will be able to contribute – even by sharing your frustration regarding any property transaction in our country.

Elena

Yo mejor que nadie se de todos tus conocimientos y esfuerzos en esta materia de la formalización de la propiedad, ya que tuve la suerte de trabajar contigo en COFOPRI (Perú). Te deseo el mejor de las suertes y éxitos. Tu Libro vale oro

Muchos saludos

Fernando

Dear Fernando,

Te agradesco! I must admit that your review of the book gave its own Reality Check Analysis. It was a wonderful experience to work together. What unbelievable times were these?! Changing the lives of everyone day by day. Having the vision and engaging more people in it. I look forward to more of that.

Saludos a ti
Elena

Congrats on the blog. A great forum on which to exchange views, knowledge, insights, research and practical experience in the area of land registration, titling and secure ownership. Seems that a number of responses need to read and understand the basic economic principles underlying the issues associated with lack of secure title and how this affects their access to formal institutions.

Overall a good beginning,

Al

Though I’ve only recently made your acquaintance… that first chapter of your book gave me a giant golden ray of hope that policy makers the world over can one day be imparted with a reliable source for truly coming to understand the dynamics of street level / poverty level economic decisions of poor individuals and communities…

Having grown up poor on Chicago’s southside, transversing the U.S., then spending time in China over the years I have become familiar with both the upper extremes of wealth in the US/China and of course the extremes of poverty in the US/China… however the hardest conversations in my travels have always been attempts to effectively communicate the decision logic of impoverished people…to people that have never gone to bed hungry.

Your overview of how informal markets trap the true value of assets and labor is the first economic text that I have ever read that truly captures the dynamics of the “crack market” that I witnessed growing up during the the crack epidemic in Chicago during the 1980’s… I witnessed crack cocaine addicts sell their labor and belongings far below formal market value in order to support their addictions… and a great many other informal market dynamics created by poverty inside a developed nation.

I commend you for your accuracy of analysis, your passion, and your efforts to impart this knowledge to current and future policy makers of world. I look forward to reading your book in its entirety in the very near future.

Finally, in the spirit of blogging and the web… I would like to pose a question:

I know that you are an “unreal” / “real” estate guru however I would like to know your general thoughts on how the institution of social welfare can adversely affect communities or individuals by have malfunctioning policy that governs the actions of social welfare organizations… and what might be measurable symptoms of a malfunctioning social welfare organization inside a developed nation such as the U.S., Japan, or elsewhere?

Darryl Penrice
Executive Director
Poverty’s Demise .Org
http://www.povertysdemise.org
darryl.penrice@povertysdemise.org

great to see the new blog up and running – congratulations!

Did you see the new report from the UN released 6/3? It focuses on the same group of people you do, for the same reasons – lack of recourse to legal institutions. Builds on some of De Soto’s work but if apparently more broad. Might be worth looking into.

regards,

Raj.
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Dear Raj,

Thank you for your comment, and support!

It is great you bring to the attention the UN Report released on June 3 by UN Commission on Legal Empowerment of the Poor.
Yes, I know of the report as well as of the Commission that has been established to promote awareness on the issue of informality. The focus is on the uneven application and enforcement of the law to the poor. The results of the study are fascinating. http://www.undp.org/legalempowerment/

I would like to hear your views or others related to the report, as well as, to the role of the UN in the whole process of transforming property markets.

Cheers
Elena