Market value: easy to see, easy to reckon and easy to “support.”
How could this possibly be a problem?
We recognize that there are other definitions of value. Many. The question we ask:
Is market value always value in the market? After the last economic crisis started, I looked at the standard definition used for real estate transactions, as per FIRREA. (Appraisers almost universally use this definition). Eight elements stand out:
- Most probable price in a competitive and open market;
- Buyers and sellers acting prudently and knowledgeably;
- There is no undue stimulus;
- Buyers are typically motivated;
- Both parties are well informed or well advised;
- Reasonable market exposure time is allowed;
- Payment is in U.S. cash or comparable thereto;
- Price is unaffected by special or creative financing or sales concessions
Each element was compared by its intent to its reality at the beginning of the crisis. What came out was STARTLING. ANOTHER FOIBLE! This was the result: The Dell Operative Definition of Market Value. The reality – – –
“Market value means 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 speculatively with exuberance, and assuming the price is affected by universal euphoria. 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:
- buyer and seller are avariciously motivated; biased
- both parties are uninformed and advised by commissioned salespeople acting in what they consider their own best interests;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold enabled by unrestricted special and creative financing provided by commissioned salespeople.”
Of the eight elements, three had stayed unchanged:
- The market was still open and competitive.
- Market exposure time is allowed.
- Payment is in U.S. dollars.
Five of the remaining elements were not true.
- The market was speculative, and not knowledgeable in speculative real estate.
- There was substantial and undue stimulus.
- Buyers were atypically
- Buyers were poorly informed, advised by commissioned advisors.
- Creative financing was rampant.
The “market” had changed from a place to live — to a way to get rich. Buyers were enthralled. Sales agents, loan agents, and executives did well.
The hens cackled and flapped their wings in excitement. The foxes fattened the hens. The roosters ran away. The wolves helped the foxes. The rattle snakes kept quiet. The farmer jumped on his new deluxe tractor. Everyone was happy.