Everyone talks about the “market,” but no one tells us exactly what it is.
The Dictionary of Real Estate, 5th ed. Appraisal Institute, defines “Real Estate Market” as “Buyers and sellers of particular real estate and the transactions that occur among them.” Close, but no kewpie doll prize. I have had at least three graduate level classes in the topic, from econometrics, business, and statistics departments.
In the appraisal literature, especially The Appraisal of Real Estate, 14th ed., it uses the word as a noun, a verb, and several adjective meanings. It is used over 2500 times in this important book. We are admonished many times how important it is. But no kewpie doll. No bell.
This is something we must see and understand. But we do not know how to specify it! If we are to analyze a market, we must be able to measure and define it. We can’t measure a market until we know what IT is!
In my research over the years, working to apply statistical and data science methods, this hit me in the nose. Before I could do believable statistics, truthful graphs, and meaningful words, I would have to figure out how to identify a market.
Appraisal material did not help. Business marketing classes helped some. Econometrics classes helped a lot. What I learned was that to analyze something, you have to first define it and measure it.
I had started teaching classes to appraisers on my own, because none of the professional organizations seemed to have any interest in what was to evolve into ‘data science’.
What I discovered was that you could not define a market in words. You had to use numbers or categories, or at least put things in order. It turned out that this was about “data types.” Some were measure variables (like building size), some were categorical (like parking spaces), and others were ordinal (like view).
Worse yet, variables measured different economic things. For real estate it includes transaction terms, (like financing and motivation), market conditions (time-series), spatial (location), and property features.
Geography, use, time, property type, and features have little or no direct association. For example, for a given type of property, different buyers will have varying desires. In statistics and econometrics classes, I learned to put a name to this problem. It is called ‘dimensionality.’ Ugh!
But with ugh news comes yay news. When you have statistical independence or geometric perpendicularity – the two variables are independent. They can be treated separately from other variables. For example, you can and should look at seller financing separately from property location.
This creates the possibility of simpler analytics.
And simpler analytics is what we learn in Evidence Based Valuation (EBV)© in Valuemetrics.info classes. We use simple descriptive statistics, like mean, median, range, and percentiles. We learn to use visuals, to help the human expert brain make sense out of the market.
September 2, 2020 @ 1:33 pm
Hello George,
Interesting post … I agree, you cannot define a market with words, you can only describe it. Similarly, you cannot define it with numbers, but you can measure its dynamics. It is the combination (along with the four forces) that help us to understand it better.
Markets have changed significantly (from what appraisers were traditionally taught). As society became more and more mobile, via the car, but also via technology, fundamentals at the neighborhood level have shifted.
Years ago, markets were segmented at the neighborhood level, with income levels, pricing, geography, etc. as defining factors. With the advent of technology, transportation, Master-planned communities, etc. you have adjacent tracts of homes with widely varying economic and physical characteristics and you have a workforce that is very mobile.
Years ago, people lived where they work and neighborhoods were not so mixed. Today, the workforce is far more mobile, able to live in one place for a few years and more to an entirely different area, keeping the same job, etc. Buyers in my market can live virtually in any area and be within 30 minutes of work, family, etc. Neighborhoods are far more fluid, economically and physically diverse.
Buyers can shift preferences from north to south, east to west, in a short time frame, collectively shifting acceptance of an area and changing its dynamics in the blink of an eye. Defining the market today is far more challenging because the fundamentals have changed, at all levels. You are correct, we never could rely on definitions, because they were too vague. The definition of “market value” itself appears to rely upon and expect precision in an arena that is imperfect at best.
Keep up the posts my friend … one never stop learning from you.
Patrick Egger
Las Vegas, NV
September 2, 2020 @ 5:16 pm
I never know what George Dell Is writing about.
I get sucked in to what seems like a highly interesting topic with potential of learning something but never fails I end up feeling highly frustrated. I’ve said this before if what you write no one understands or learns anything why waste your time or ours.
September 2, 2020 @ 6:48 pm
Larry,
If you want George to teach you something, take one of his classes, I assure you that you will learn a lot. George is a deep thinker, and his blog or posts are less about him teaching you, more about raising issues and getting readers interested in discussions or researching the topic and developing their own opinions.
In appraisal school, instructors stand up and connect the dots to teach you something you don’t know. Once you become an appraiser, this still happens, with new material designed to teach you new topics, things you were not taught in the principles class.
George is questioning what we’ve been taught (or not). The target of the post is an experienced appraiser, one that should have some idea of what a market is or isn’t. The question George raised wasn’t intended to be answered in by the post, but rather from our thoughts and responses. He’s questioning the dogma and pointing out just how vague (and therefore subject to many perspectives) the doctrine of our profession is. At the same time, asking us to think about it, agree or disagree, post back, etc.
I’ve known George for many years, I’ve been in his class and I’ve seen his styles. At times, he’ll take you by the hand and say follow me. Other times, he’ll take you by the brain and say, what do you think? His posts here are often the latter, while his classes are the former.
There are times I wish he would write more in depth, but that’s what his classes are for. Here, he’s looking for feedback … that is how a good instructor finds out what is important and where the disconnects are. George’s posts aren’t statements on his positions, but rather surveys on ours.
Just my two cents
Patrick Egger
September 5, 2020 @ 11:34 am
I agree with Patrick. I learn something new every time I take Stats & Graphs, and I have been attending since 2006. Oakland next month will be my 15th class and I am looking forward to it, and bringing my new trainee, to throw her into the deep water.
George is very good at raising thought provoking questions. Too many licensee’s only took prep classes and have not taken any advanced course work since they came into this business. To me, I think Principals, Practices, Finance, Law and Economics should be required before any appraisal course.
It is i the courses that we learn vocabulary. We learn concepts, fundamentals, processes and procedures. I took all the courses for the SRA and MAI, 12 in total, then, took more to get a MS in Real Estate Appraisal; meaning I have had many courses and still learn from George every time I take his classes.
He says I am getting close to passing this time.