HIGHLAND, UT | 29 July 2008 | The International Monetary Fund (IMF) announced recently that housing prices in the U.S. are “overvalued” by as much as 20%. A common misconception in the world today is that things have inherent value and that when prices fluctuate they become overvalued or undervalued. What the IMF and other economists are really attempting to do is to scientifically measure the amount of Human Life Value (HLV) at work in a given marketplace. They measure items such as whether fear or faith is dominating the actions of humans in the marketplace; whether people are exchanging like they have in the past; and what the perceived self-interest might be for those potentially available to exchange in the market.

Key Points

• HLV determines the value of things. If every human ceased to exchange, the value of items in the market would drop to zero, as became apparent last week in Flint, Michigan, where a house that sold three years ago for $110,000 could not be sold for $6,900. This is a perfect example of how property values are worthless without the human element.
• People are driven either by fear or faith. When on fear, people usually refuse to act or begin to act very irrationally. We see that with the panic stricken lines in front of Indy Mac and other banks as they are forced to close their doors. (Funny how the government and others are playing games lately with these bank closings to reduce these panic lines, but that is a discussion for another time.) When people check their emotions with more rational thinking, faith has a better chance of setting in and people may find better solutions to their challenges.

Conclusion

There is really only one cause of recession and price deflation. That is the human element. When human beings exchange, those involved in the exchange become enriched. When exchange slows down, poverty and scarcity set in. The problem with all of thee fantastic gadgets to predict trends and explain conditions is that they tend to become self-fulfilling prophecies. When indicators show a slow down, people tend to panic. Panic reduces action and productivity, which in turn restricts exchange.

Humans determine value. Those who will profit the most in these economically difficult times, will be those who most successfully get others to exchange with them. This will require a lot of cool-headed thinking, a high degree of persuasion, and ideas that make life easier for those whom one wishes to exchange with. In short, the higher the HLV, the greater the value there will be in exchanging with that person.

Action Items

1. Whatever your chosen field may be, seek to increase your HLV by looking for ways to increase people’s willingness to exchange with you.
2. If third party lending is usually a catalyst to the exchange, like it is in real estate, seek for ways not to need that part of the equation for the exchange.
3. Improve your communication skills in order to persuade prospective people to exchange with you.
4. Specifically related to real estate, consider ways of exchanging while still holding onto that property until more people are willing to exchange, thus increasing perceived value in the market.
5. Seek other areas to create value in to offset your losses in real estate.

MRFC Principles: 6 (2, 4, 5, 6, 8 )

Sources

Lesley Wroughton, U.S. house prices overvalued by up to 20 percent: IMF paper, Yahoo! News, July 25, 2008.

Valdimir Klyuev, What Goes Up Must Come Down? House Price Dynamics in the United States,imf.org, July 25, 2008.

Bob Ivry and Sharon L. Lynch, Fannie mae Unsold $5 Billion Homes Brings Peril to Shareholders, Bloomberg.com, July 23, 2008.