principle of substitution

[moh malekpour]

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 maket 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?

 

[Richard Carlsen]

But human participation in the universe has made that balance totally and permanently imbalanced.

Moh

I totally reject your premise that the interjection of humans into the universe has thrown things out of balance.

Humans are part of the universe, however you say they arrived here. We are not an alien species or an interjection or an afterthought. There is not and never was a primal utopia before mankind. Things were different before humans but that does not make the better or pure. We have as much right to participate in the world as any creature.

Look, my vision of the market does not go into right or wrong, good or bad. I'll leave that for the philosophers, theologians, mullahs, et al. To me, the market just is. I do not judge it as being in the right or as something bad. We do tend to personify the market when we describe it (the market is moving toward balance for instances or the market took a turn for the worse). This is just a way of speaking and most likely a limitation of our language. The market has no mind to decide to be up or down or good or evil. It just is. It is the collective action of all the participants that is conveniently referred to as being one entity; the market. As long as there are participants able to act, the market will exist.

And that is what I am saying about the real estate market (where we started this discussion). It is seen as "a market" but it is the result of the accumulation of all related activity that effects all aspects of real estate in any defined area. It is not one specific thing or another, so to say that values are doing this or that because of one specific cause is reason, as I said, to take that persons statement with a grain of salt.

 

[hastalavista]

Nature abhors a vacuum... and so does the real estate market.
Equilibrium is what results when all forces are in balance. This is the dynamic of market. In a perfect market, this would be achieved. But, the market is imperfect and not coordinated to act in unison (mutual interest); the forces act in their own best interests. The fact that equilibrium is rarely achieved doesn't negate the fact that this is the force that drives the market.


I'll repeat what I said earlier.
The supply/demand dynamic will set the overall market environment.
Principle of Substitution will determine, within that environment (surplus or shortage or stability) what one is willing to pay for the subject vs. houses "A, B & C".
Supply/Demand can explain where the market has been, is at, and perhaps 'hint" as to where it may go.
Principle of Substitution will explain why the subject is not worth more than house "A", is worth more than the house "C", and is equal in value to "B".

 

[Fred]

What a convolution of macro and micro concepts! Substitution does not rely on "balance." Either one.

The principle of balance has to do with the proportion of components in the property, not the balance between supply and demand.

 

[hastalavista]

Steven-

Where have you been?
This topic is already into day two!


(edit: Day 3, actually.)

 

[Fred]

Writing reports.

 

[Steve Owen]

Substitution does not rely on "balance."

No, but balance does rely, in part, upon substitution.

 

[moh malekpour]

No, but balance does rely, in part, upon substitution.

In theory, it seems to be the case but in practice it is not. Suppose you have a slow market with no buyer for existing or new homes and your city planning decided to put a moratorium on building permits and since there is no permit for new buildings, people are reluctant to market their homes. According to the substitution theory, there should be a change in the market balance because there is a shortage on new and existing homes but for some reason, there is still no demand for neither new nor existing homes and if existing homes were marketed, no body would buy it. What is at work here, substitution or demand? the shortage of substitution for new or existing homes didn't change the balance.

 

[Steve Owen]

Huh?

In theory, it seems to be the case but in practice it is not. Suppose you have a slow market with no buyer for existing or new homes and your city planning decided to put a moratorium on building permits and since there is no permit for new buildings, people are reluctant to market their homes. According to the substitution theory, there should be a change in the market balance because there is a shortage on new and existing homes but for some reason, there is still no demand for neither new nor existing homes and if existing homes were marketed, no body would buy it. What is at work here, substitution or demand? the shortage of substitution for new or existing homes didn't change the balance.

I think you just proposed the theory, with lots of hypotheticals, and not the practice of typical market reaction. Substitution always helps bring a market back toward equilibrium unless other factors, such as monopolistic power or government interferrence prevent that from happening. The classic example is pork for beef. When beef prices get too high, consumers start substituting pork for beef on their dinner tables. As a result there are fewer sales of beef, demand is lowered in relation to supply, and the beef price begins to moderate.

You can see the same thing play itself out over and over again when markets begin to get out of balance. Supply and demand are primary determinants of price; substitution can moderate the effects of over or under supply by working on the demand side and the result is the market moves back towards equilibrium or balance. (Note that some theorists say a market is never actually in balance... I say that could be true, but is more a matter of semantics than reality.)

 

[DTB]

In theory, it seems to be the case but in practice it is not. Suppose you have a slow market with no buyer for existing or new homes and your city planning decided to put a moratorium on building permits and since there is no permit for new buildings, people are reluctant to market their homes. According to the substitution theory, there should be a change in the market balance because there is a shortage on new and existing homes but for some reason, there is still no demand for neither new nor existing homes and if existing homes were marketed, no body would buy it. What is at work here, substitution or demand? the shortage of substitution for new or existing homes didn't change the balance.

Moh,

You have to expand the thinking a bit. Try this childhood example and see if it helps explain the priciple of substitution.

A kid goes to the corner store for a snack. He thinks he will buy a bag of chips. When he gets there the chips are sold out and the owner says he won't be getting anymore chips in. What to do?

If you are determined to buy chips, you go elsewhere ( to another SUBSTITUTE market). If you are willing to have a SUBSTITUTE snack, perhaps you purchase a bag of pretzels.

Thus when there is limited supply, your substitute will come from a similar but other market or you sustitute a different type of property if going outside the market does not appeal to you.