This is silly – modernize value . . .
Everybody knows what value is. Even if we have several different definitions of the word. It’s market price. Easy. No need to explore.
Or is there?
This Modernizing Appraisal series is about the analysis process, not FannieMae and FreddieMac reporting requirements. The process is identical: 1) The problem; 2) The data; 3) Predict or adjust; 4) Communicate. We continue here on #1 – defining the problem to be solved. Read the earlier parts of this series here.
Words have power. Words carry concepts. Words carry entire culture groups. Groupthinks. And entire civilizations. But we all know price equals value. Easy. Price = value. Everyone knows that!
Estimated value is a critical part of the American dream. A home, a place to rest, to eat, to play, to procreate, to feel safe . . . And we have defined value as price. “Most probable” price.
So what do you get for the price? (Defined as value! Whether it is or it is not!)
Let’s look at this price paid. It includes the land, the structure, and a few “site improvements.” That’s the house itself. That’s it! Add some love and – you have a home . . .
But wait! There’s more. A commission, escrow, title insurance, transfer tax, application fee, origination fee and, of course – appraisal management fee AND the appraisal itself.
These transaction costs tend to add 8% to 10% or more to the “cash” price. Are these elements, all in the dimension of “transaction” costs, genuinely a part of the value of a home? Just because we say value is price – does not make it so.
(Keep in mind that these transaction costs now become embedded as a “comparable home sale price” for the next transaction. In turn, this next transaction becomes a comparable for the next, and so on.)
If value is price is the result of interaction between buyer and seller, then what is a typical buyer buying? Yes, a home. But is that all? We know that people also buy to build “generational wealth.” In fact we can say that part of a house purchase is for speculation/investment.
In the past, it was rare for a buyer to buy for investment reasons. Today, we see corporations buying for the rent income plus future capital gain. Gain where depreciation tax deduction becomes part of the advantage of this investment type. And where the interest payments also have a tax deduction benefit.
So it appears that a home is not just a home. It is part transaction costs, part speculation/investment, as well as a fulfillment of the “American Dream.” These various costs (and others) are not part of the intrinsic value of a “home” – but do affect prices severely, and have unintended consequences!
We have a national home ownership problem. A home-less problem. And a possible bias problem.
And it appears we have created a number of structural, conceptional, and legal constructs – costs – which all put upward pressure on “value.”
Do all these combine with others — agent commissions, loan commissions, executive bonuses, and even pressure on appraisers to “come in” to the price – to exacerbate the problem we thought we were solving?
Do we see yet another financial crisis coming. Or is it already here?
We dedicated valuemetrics.info mission statement to “help prevent the next economic meltdown!”
It appears we have failed.
October 20, 2025 @ 4:28 pm
Home affordability (measured by sale prices or rents) is one of the most pressing issues of our times. Economic concerns are a critical factor in how people vote, and why our democratic experiment is now facing an existential crisis.
That aside, I want to make an important clarification: price is not value, and value is not price. Price is what someone pays, it is an objective fact. Value is what something is worth, it is an opinion. On a continuum, this opinion might be wildly subjective, or if prepared by a valuation professional using sound data and analysis, it might be relatively objective. But value is an opinion nonetheless. Ten appraisers valuing the same property at the same time with the same conditions will almost certainly not come up with identical valuation opinions. Warren Buffett perhaps said it best: “price is what you pay, value is what you get.”
I should also point out that value is not necessarily “most probable price.” That definition, in fact, is used in only one context, which is mortgage lending. There is no other market value/fair market value definition I’m aware of that uses the term “most probable price.” I don’t do mortgage lending, and I almost never use the most probable price definition. There have been debates for decades about whether various definitions of market value and fair market value are functionally equivalent, particularly with respect to the value standard (highest price, most probable price or no qualification at all to the word “price”).
I wrote an Appraisal Journal article a few years ago on the topic of Market Value that took a deep dive into some of this stuff:
https://static1.squarespace.com/static/64ff4c87e29e7059fecf5d45/t/6503505b7638367c4aeb8aa7/1694715995319/Market+Value-+What+Does+It+Really+Mean%3F+%282018+Swango+Award%29.pdf
Finally, it is quite true that numerous transaction costs are baked into the price paid for real estate. Would the fundamental value or intrinsic worth of property be different if we could just consider its objective characteristics? Perhaps, but how can this be done using sales data from the market? One might argue that the income approach would be the best way to measure intrinsic value, but this approach is not normally applicable to single-unit residential properties, and usually entails at least some degree of judgment (subjectivity) on the part of the valuation professional. Do transaction costs (brokerage commissions, escrow, title insurance, appraisal, etc.) add value to the transaction? If so, is it reasonable to include them as part of market value?
Food for thought.