We’re gonna crash! Now What?
An appraiser’s job is to reflect the market. A couple of questions: What is “the” market? And how do I reflect?
I like to divide consumer behavior into two thought patterns: Micro and Macro thinking.
- Micro thinking is under the assumption that the buyer is buying for personal use – like a home, a business industrial building, or even a “trophy” property.
- Macro thinking is under the assumption that the buyer is buying for a financial return – like an income property, speculative try, or even a currency hedge.
Micro thinking forms the main behavioral assumption of appraiser education. That buyers are making preference trade-off decisions: Swimming pool, or another bedroom? Loading dock or yard storage? It is about immediate personal use decisions.
Macro thinking is more future oriented. It is about risk and hopeful reward.
We’re Gonna Crash Now! Is a macro thing. Fear of the near future.
Sometimes it is “irrational exuberance” – “gonna get rich!”
So what is an appraiser or buyer to do now?
In Evidence Based Valuation (EBV©), market analysis is the core concept. This includes time adjustment. Market analysis is inseparable from market trending. But there is more.
Market Price Indexing (MPI©) includes several interlocked but critical models. These include:
- Competitive market delineation (similarity scoring)
- Bias (analytic) versus uncertainty tradeoff
- Velocity identification and depiction
- Change sensing and forecasting
- Risk/reliability scoring
While the above list may seem fairly technical, the theory and use are easy for appraisers to understand. We apply clear thinking and clear concepts to what appraisers already do and think.
Best of all, (and the most fun), is the use of visuals. Graphs (using RStudio) have multiple usefulness. Graphs:
- Sharpen and clarify analyst critical thinking and opinion-forming;
- Speed work, as they present much useful information quickly;
- Show to users visually, conveying with far fewer words.
There will be two basic outcomes for any commercial or residential market crash, this time.
- Transactions (comparables) will be sparse, making reliability more difficult.
- Analysis skills to detect and measure market trends and swings become critical.
Modern analytic software is not difficult to use, but does require a learning curve. Coming GSE “forms” and dashboard applications will not provide a substitute for competence. As the software gets easier, underlying competence, critical thinking, and ‘statistical’ concepts will become more important.
Modernization is more than layering data, inspections, and form-filling. It is also about attitude!
The crash is coming. Be ready. Be happy. Be of service.