Sunday, March 8, 2009

The Tyranny of Value Evolution

How do you know what your home, vehicle, or computer is worth?

An appraisal, that is how.

You or someone else determines what that property's value is. After you or an appraiser happens to determine that value you may put it up for sale at that value, and then you will find out how good of an appraisal it is.

If 300 people come knocking at your door with cash in hand and they are fighting to be first in line, you may feel that appraisal was too low.

On the other hand, if all you hear outside for the next week is crickets chirping then you may feel that appraisal was too high.

The unfortunate truth is that depending on what day within a ten year period you try to sell it at that value, either the clamour to buy it or the cricket sounds of disinterest may come to your door.

Value evolution is so common we all understand it as a common phenomenon.

In other words the value of our home and everything else we own does not have a scientific, fixed relative value over the time of economic cycles.

It is a lot like desert sands that change shape as the winds blow from one place then another place over time.

Thus, we are not in a financially stable value condition because value is subject to value evolution. We are financially evolving value all the time.

That means party time when value is going up, and it means depression time when value is going down.

But clearly it is not stable in the sense of permanent or fixed. And professional appraisers do no better than you can do in the final analysis.

In an article in Appraisal Journal Magazine the following statement was made:
The universal goal of an appraisal is, or ought to be, to provide an accurate estimation of value. There are two broad ways in which appraisal accuracy can be achieved. One is to rely on the individual judgment and experience of an appraiser. A second is to establish scientific procedures that must be followed, which serve to guarantee or at least enhance the objective of accuracy, so that reliance on the subjective expertise and experience of an individual appraiser is minimized.

Those who emphasize the former tend to think of appraisal as a process akin to art. According to this view, providing an accurate appraisal is not, and can never be, a matter of science ...
(Appraisal: science or art?). In recent history we would probably say the appraisal business is neither science nor art, it is BS.

Values have fluctuated wildly in oil, gas, homes, food, and just about everything else over the past 10 years.

If we do not dare think "there has to be a better way" there never will be.

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