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# Shaking up the SM real estate market
- URL: https://www.smdp.com/shaking-up-the-sm-real-estate-market/
- Published: 2008-04-09T15:00:00.000Z
- Updated: 2026-10-24T23:52:38.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By MIKE HEAYN is a Washington Mutual Multi- Family Loan Consultant. He (310) 428-1342, or e-mailed at*

THE OTHER DAY SOMEONE ASKED ME what I thought their home was worth. Honestly, this is not an easy question to answer. Sure, you can take the comparable sales of an area, see what similar properties are selling for and make a judgment call from there. However, at the end of the day, worth or value is dependent on a buyer and seller. If a milkshake maker is selling a milkshake for $6, but I will only want to pay $4, what is the value of the milkshake? You could argue it is worth the difference, or $5, but if someone else comes along and pays the full price, the perceived value would be $6 and I would be out of luck. The same principal applies to real estate values, but another variable is present for the majority of buyers — financing. Last column I wrote about types of financing. As a refresher, financing is borrowing money to purchase an item. Usually you borrow money for large items you do not have the total amount of money needed to purchase such as a car or home.

Going back to the milkshake example, let us say everyone agrees on the full price. At $6, the milkshake maker or shakatier makes a profit of $2 a shake. However, due to a rare cattle disease, which killed many cows and decreased the production of milk, the same number of buyers were left having to compete for less milk. Since there is less production or scarcity in the market place, the price of milk skyrockets. Now that increased cost of milk is passed onto the shakatier lowering his profit from $2 to 10 cents. The shakatier has to increase the price of milkshakes to cover his expenses and make a profit. Once he increases the price of shakes from $6 to $7, people stop buying. The milkshake maker drops the price to $5 to get business going again using his cash reserves to cover the loss he incurs from every milkshake he sells and his expenses. After the cash reserves are gone, the shakatier has no choice but to go out of business.

If we take the milkshake example and apply it to the real estate market it will be easy to see how home prices decline. One of the most significant variables that affect home values is financing. Most homeowners go to a bank to get financing to cover the difference between the down payment and purchase price. If a bank decides that a specific area is declining in value, the bank may limit the amount of money they will lend, further lowering values, leading to a downward spiral in home values. Just like the shakatier, a homeowner can only sell their home for a specific price before they take a loss. Homeowners become hostages to their homes unable to move without incurring a loss. The problem is that the bank needs to be paid back first and if the bank is not paid back in full, they can go after the homeowner for the difference.

Just like an appreciating real estate market builds on itself, so does a depreciating real estate market. As financing becomes more difficult to attain, fewer buyers are out in the marketplace looking for homes. This cycle typically continues for several years until it bottoms out. At the current time, banks have to deal with the losses they incurred from the subprime “easy lending” days. Not until banks have dealt with the losses will buyers be able to return to the marketplace and homes begin to appreciate again. Nevertheless, with all downswings in real estate cycles come upswings.

*Originally published in the Santa Monica Daily Press print edition on April 9, 2008.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/040908.pdf?ref=smdp.com)