principle of substitution

[Richard Carlsen]

You should get out of the class room and text books and face the reality of the market. Market doesn't act rationally and is not balanced because the market participants are not acting rationally.

Moh

I'm not in the classroom. I've been in the real estate market place for 31 years. The market does not act rationally or irrationally. It just seeks balance. If a participant in the market acts irrationally, the market will tend to compensate for that somehow to achieve a balance position. One thing that you also have to understand about market participants: Irrational behavior is sometimes normal behavior. Stock market plunges and folks bail out. At the same time, the smart investors buy. That is the market seeking balance.

My objection to putting the blame or cause on one or a limited number of market participants is that whenever you see them and there activities, there is always something or someone within the market that is moving to offset that action. Giving credit to one side is totally ignoring the other parts of the market.

 

[Richard Carlsen]

Quote:
the market will tend to compensate for that somehow to achieve a balance position
Richard,
What do you mean by market balance? Are you in free market ideology or market economy? Do you think the market and market participants are two different entities or one? Are you ignoring the market competition and manipulation?

Market balance in real estate is a principle that essentially states that a proper economic balance between the types and locations of the various land uses exists and that value is created and sustained. In a perfectly balanced market, supply would equal demand and values would be static. That is what the market is always trying to move to.

As to the market and the market participants being two different entities or one, I would have to say that the names define them: the market participants are part of the market. They are not the same since the market also contains the goods that are the object of the markets activity.

Am I ignoring market competition and manipulation? No of course not. Competition of the market products and the competition among the market participants are some of the essential aspects of the making of a market. As far as market manipulation goes, it is just a chosen activity by a market participant that may temporally swing the market out of balance but excluding outside non-market participating actions (governmental, laws, etc.) the market will, after any period of manipulation to an advantage of a particular participant, tend to move away from an advantageous position for that participant, often moving to the opposite extreme before attempting to move back to balance. A good example is the S&L crisis where some leveraged purchases to an extreme profitability in a way that was dangerous to the well being of the market. The reaction of the market participants was extreme with new rules, laws, restrictions, etc. that actually may have caused the market to over-correct.

Balance is a key element not just in the market but in many things in the world around us. Water tends to seek a level state. Rapidly spinning objects tend to rotate around a common point so the spin is smooth and not wobbling. The Supreme Court in its great decisions has swung from one side to another seeking a balance that conforms to the Constitution. Think Dred Scott case and all that followed. As humans we seek to have our lives in balance between sleep and wake. When either is out of balance, things are just not right with us.

I am not talking about any school of thought or economics when I speak of balance. What I have referred to is the real estate market. We have all seen where the lure of making money will bring people into the market as participants on the lure of quick turn around and large gains. Houses sell fast and values go sky high. However, when the market reaches a point where the large profits cannot be made and there are no more new participants coming into the market, the supply of inventory expands as people try to cut there losses and get out quickly. Result is that values can plummet just as fast as they went up. And values will go down until the appeal of the real estate and the cost to acquire it is reasonable and attractive enough so that new participants will begin to come into the market. At this point values begin to level. The market is seeking balance.

That's a very simplistic way of looking at the market. However, I have found that over analyzing what is going on in the market may be a good intellectual exercise but it tends to focus one on a particular aspect of the market and give too much credit to that activity for the market's actions. One thing that must be remembered is that there are dozens of influences on any market. Some may be related with activity in one area resulting in a cause/effect action on the part of the market. At the same time, something totally unrelated to the first activity may be working out its balancing act in the market. In reality, there are most likely dozens of separate, distinct market activities taking place at any one time in a market. Some pulling toward over supply; others pulling toward shortages. This is the reason that I say that when someone says that the cause of the market being in its particular condition is one particular activity of a participant, I take that statement with a grain of salt.

 

[Richard Carlsen]

Moh

It must be Friday night. Somehow my reply go posted back up on #32 I think it is. I must have clicked the wrong button.

I better be careful which button I press or Pam will get me.

Have a good weekend my friend.

 

[moh malekpour]

Richard,
You are theorizing or may be philosophizing by your balance theory. The universal balance theory is not something new. It is an ancient philosophy and fundamental in Buddhism and is practiced in the yoga meditation. But human participation in the universe has made that balance totally and permanently imbalanced. Look at global warming. The damage is so huge that the nature cannot compensate and balance it back. Look at diseases like cancer or aids that the human body cannot heal itself anymore and even the best medicine cannot help. Your body system is supposed to balance and heal itself but if you start taking drugs and alcohol and fat food and no exercise, you are going to explode. If there was a balance in human body or universe, why should the world or human physic be exploded? The same thing is true about the market. The market wants and should balance itself but the market participants will not let it to happen because of greed and ignorance. The market can explode and totally vanish if it is abused over and over and it has happened. Your ideology or philosophy is good for free market and that is what it says in the textbooks but in real world, there is no free market.

 

[Thomas N. Morgan]

Anyone who has sold real estate will realize Richard Carlsen knows what he's talking about.

 

[Steve Owen]

Anyone who has appraised real estate should realize that Richard Carlsen knows what he's talking about.

 

[Dona Roberts]

Thanks Richard

Richard,
Just wanted to thank you for sharing your time and experience on this forum. Your insight, experience and knowledge are invaluable and a great learning tool, especially to the new people in the field (like me)

 

[Jungle Boy]

Dona
feel confident that Richard nailed it. He definately "got" it right.

 

[Richard Carlsen]

Dona, you are entirely welcome. I really appreciate your kind words.

Any knowledge I have is mine only because someone, somewhere along the line shared it with me. To me, one of the highlights of any day is seeing a problem thrown out here on the Forum, followed by responses from knowledgeable, professional appraisers, not intent on beating one another down but building up, assisting each other and sharing our knowledge base and experience. We've thrashed and trashed topics up one side and down the other, often agreeing to disagree but never holding back on our knowledge, understanding and valuable experiences so that all may benefit. This is a good place to learn.

Again, I thank you for your very kind words. They have certainly helped to take away todays gloominess from having just finished blowing 14 inches of snow off of my drive.

 

[Wil in Norcal]

You are correct Richard, this form is an excellent place to learn! This forum is a key component in my continuing appraisal/business education. So just so I have clarification, if possible, If subject property is under contract for 400k, and I have several (5-6) comps that support a value that is near that price, that are recent(within 3 months) and a mix of both new homes of the subject floor plan and resales am I unable to conclude, that value is 400k, although it is well supported by recent sales, due to the fact that a well informed buyer can buy the same floor plan with similar amenities for 20-30k less (only by using the builders in house lender of course)?