Everyone knows what’s a market — (or do they)?

Market Value is the ultimate goal of appraisals, of AVMs, of evaluations, of BPOs, hybrids, exceptions, and all forms of opinions (everyone has one).

So, market value must be based on “the market”!  To measure it, we must first know what it is.  The dictionary has two basic meanings:

• It is a place where people buy and sell (nowadays it can be electronic).
• It is a space where buyers and sellers come together, and where supply and demand affect prices.

In economics, a market coordinates price information between participants.

In valuation, a market concerns specific buyers and sellers that have a specific competitive nature.  In vintage appraisal process, a property is comparable if it is similar, competitive, and “able to be compared.”  No rigorous definition exists.

In EBV^© (Evidence Based Valuation), we call the most relevant information the CMS^© (Competitive Market Segment).  (We copyright these terms and acronyms to maintain clear definition and discourage abuse or misuse.)

The CMS is defined in terms of property type, transaction terms, time, space, and features.  These dimensions help define the CMS both mentally and quantitatively.

There are two areas where this clear definition is critical:  1) data selection, and 2) trend analysis (time adjustments).

Data selection

Data becomes useful information in only three basic ways:  classification, association, and sequencing.  Data is just data.  Information helps in decision making.

Given today’s instant availability of complete data (in most areas), there is simply no analytical reason to discard perfectly good information.  More information always improves both the sureness and trueness (precision and accuracy) of the analytic result.

Consistently, the outcome of having complete data is that ‘adjustments’ become either less necessary, or more clearly calculated.  Another outcome is that reliability (risk estimate) can be an inherent part of the valuation process.

Trend analysis 

Time (or “market conditions”) adjustments can be then reliably made on that very CMS.  This involves a simple, straightforward process:  1) Identify the time back needed; 2) Fit a trend line (usually linear least squares); 3) Apply the regression coefficient (in $/day) to each comparable’s date of sale.

Market conditions and forecasting

A time adjustment is best based on the actual market segment – the CMS.  Market conditions have time as the predictor variable.

Additional predicted variables can be micro-calculated within the specific segment.  Such as:  list/sale price ratio, exposure-time trend, and market-specific inventory levels.

Appraisers have the best competence to provide these types of much-needed valuation/risk measure products.