I thought I knew what market value was. Back in the day, market value was pretty darn close to the price someone would pay. I went to the new dictionary on line – wicked pedia files and they had it defined in this fashion.
In the US, the most common definition of Market Value is the one promulgated for use in Federally regulated residential mortgage financing:
- The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
I have read and re-read and then read again this long paragraph. I am begining to understand “the devil is in the details.” That definition sure looks impressive, but does it represent what we agents perceive to be a market value? The opening sentence reduces what follows to ambiguity. There is no definition of the all the conditions necessary for a fair sale, but it goes on to mention that the buyer and seller, each acting prudently, knowledgeably and assuming the pirce is not affected by undue stimulus.
There seems to be a disconnect between the definition here and what is being referred to as market value in the streets of our cities. I figured that I should go pull out the bible (Modern Real Estate Practice) and see what would be defined there.
Market Value – The most probable price property would bring in an arms-length transaction under normal conditions on the open market.
Well the variety of prices I am seeing for similar homes in similar neighborhoods is beginning to make sense.
We are not working under normal conditions. Market value has morphed into the 21st century answer to the question – What would you like market value to be? or What do you think market value is?
Market value is not only what someone would pay, no, market value must include what someone will pay and what someone will accept. You see, we went from an extended family society to a nuclear family society and that is another chicken that has come home to roost. Our frenzied search for privacy has created an isolationist mentality that has led pricing to vary house to house, neighborhood to neighborhood, town to town, county to county and state to state.
There seems to be a false sense of entitlement (the people up the street got this much, we should too), combined with a false sense of value (I paid X and it should be worth Y% more today) with a dash of overstated upgrade-itis (well we put a new coat of paint in the rec room, took me three days and that had to double the value of the basement) that is now factored in pricing.
It becomes more difficult to advise a buyer, when there is little apparent rhyme or reason for the way homes are priced in any neighborhood. The differences were obscured in the sellers market that ended with Katrina. (Don’t you all just love that I slip those references to the ongoing plight of Katrina victims every chance I get?) Now that properties are sitting on the market longer, the aberations glare at you from the pages of the MLS. The stalemate continues because we don’t have the normal conditions required.
We live and work in “the market”. The market changed and we experienced that change as it occured. The average homeowner only read about it. They noticed the for sale signs lasting longer. They took in audio and visual cues and began to perceive “there is trouble in river city”. This change and the subsequent press releases created an air of uncertainty.
Interest rates remain historically low but the public perception is anything but that. Well, we can stop with the “interest rates remain historically low” routine. It is not the interest rate that has folks uneasy. People are not comfortable with the current monthly payment it will take to buy a home, that they may have been more comfortable with last year or the year before. Please don’t bore me with facts. I am talking perception and bottom line impact on buyers. We can bring “interest rates are only a point or so higher and they remain historically low” to the dance, but we are going home with “the payment is $200 or $300 more per month and that is too much”. Forget interest rates……..payments went up and that created a market out of reach which led to more uncertainty.
The new reality is the 2 year ownership cycle is a dog that won’t hunt and buying, rehabbing and selling in a few months…well, flipper don’t swim here anymore.
Market value has become something that is identified on a house to house basis. CMA’s will become more general until such time as the pendulum makes it’s way back to a sellers market. My hope is that the damn thing slows down, so we can adjust from one market to the next. This sudden change in market value from one to another would leave Clark Kent in his boxers. Really.