What Does Mark To Market Accounting Mean For You and Your Home’s Value?

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If you’re like most people, you’ve probably heard a new financial phrase in the news called “mark-to-market accounting” and wondering just what it’s all about.

Mark-to-market is really nothing but a pseudo confusing accounting practice that says you should price your goods at prices the market is willing to pay for them.

Meaning, you take an asset like your home and find out what a potential buyer might pay you for it.

Nothing more. Nothing less.

So what’s all the fuss about? Why do we keep hearing this accounting practice is so bad for the big banks that caused the financial crisis in the first place?

Well, truth is, mark-to-market accounting can really hurt you as well.

How Mark-To-Market Accounting Can Help or Hurt You

The Achilles heel of mark-to-market accounting is the current state of the economy, and how the economy has influenced the price of assets, equities, or anything else that you might want to buy or sell.

For example, if you are a homeowner and you’ve had a few foreclosures in your area, chances are that the value of your home has decreased in value.

Why? Several reasons:

Vulture investors are bargain hunting. Any number of vulture real estate investors have the opportunity to sweep in buy those foreclosed homes at deep discounts.
Reluctance to buy. If people are fearful of losing their job, they’re not going to take the risk of buying a home that might end in foreclosure just like your neighbor.
Buyers can’t get a mortgage loan. Banks are returning to traditional lending practices which means buyers must pay a larger down payment.
Lack of trust. A growing number of Americans no longer trust the propaganda from the National Association of Realtors. Why should anyone trust an organization that fanned the flames of the real estate bubble as best they could when their years of experience should have known a collaspe was imminent.
Waiting for a better bargain. Why should you jump in now when prices might be lower next month? Next year? Market timing is dangerous, but a certain segment of the population will always try to time any market when speculation tells them that prices may be lower in the future.

Bottom line, if you and your neighbor bought a home at the same price 5 years ago, and his foreclosed home just sold for 20% less than the original price, you can bet your home’s value has dropped to an equivalent or near equivalent amount.

On the flip side, if you bought a home and sold at the peak of the market in 2006, then you’re a huge proponent of mark-to-market and probably wondering why everyone is so pissed about being underwater. You might also be a vulture investor looking to make a few real estate investments at 20% to 50% off peak prices.

The Danger of Fire Sales

Perhaps the best way of defining mark-to-market accounting comes from Dan Green, at The Mortgage Reports Blog. He gave a clear cut, Twitter-like definition of mark-to-market accounting by stating:

Mark-to-market is a bank valuation model that assigns loans-on-the-books a “fire sale” value, even if the bank has no plan to sell.

The caveat of this argument is your intent to sell. If you don’t plan on selling your assets, you really don’t have to worry about it.

Sure, you might be harshly hit if you have a home equity loan, a second mortgage or require a substantial amount of credit to get by, but by in large, as long as you can pay your mortgage you have nothing to worry about as long as you plan to remain in the home.

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Photo by David Zalubowski/AP