Market Action and Reaction
I believe it is time that we take a practical look at what a subject’s market is…
Drawing on part of my heritage, the Native American Cherokee part, “Many Moons Ago” when I was employed as a Management Consultant/District Director for a Century 21 Franchisor, one of the challenges that I faced in dealing with over 50 separate brokerages was helping these often small brokerages define their markets.
There was a theory that someone had come up with that it was about a 3 mile radius around their office. Well, in some cases that would have put some markets in the Chesapeake Bay or the Atlantic Ocean, or even more likely, on a military base. In my efforts to help the brokers understand, I would have them put up a large street map. Then have them locate where individual agents lived. Next step, put up a pin or marker where their listings and pending sales were located. More often than not, “market” activity would be clustered near where their agents lived.
The secondary market, Fannie Mae and all the little mae’s seem to believe that a market is comprised of a neighborhood. That must be the case since everything, reports, the 1004MC all relate to neighborhood activity. To some degree that may be the case, but it is becoming less and less true. Not only should our concept of a market change, so should the boundary lines of that market.
Market is the entire county…
In one County in North Carolina where I do appraisals, there is not even a town, just place names. And, although there are some named neighborhoods, the market is the entire county and often parts of the adjoining county. Market activity, wages, employment, housing cost, amenities, and a host of other reasons help define a market. Which leads me to another aspect of a “Market”. That has to do with understanding or reading a market.
I was recently asked by an Underwriter to put into a report… ”why” the market did certain things. My reply was that I did not have the qualifications to be able to define the collective thinking of a market. As Judge Judy would say, “that calls for knowing the operation of ones mind”, something I certainly am not qualified to do. I can tell you what a market has done by looking at the evidence. I cannot tell you “why” the market has done what it has done. It is likely that not even a Phd Behavioral Scientist could tell us that. Sometimes there is no logical reason for a market reaction. But, it is a reaction none the less. Take for example, an appraisal I did several years ago. A Ranch style property where there were 4 model match sales within a mile of the subject. Problem was, one of the sales was for $8,000 more than the other sales. There seemed to be no apparent reason for the difference. But, the subject had been listed at the higher amount, exact same amount as the higher sale. My opinion reflected a market reaction and value similar to the lower sales prices. That was challenged by the listing agent and buyer who asked for a reconsideration of value.
Why did you pay so much more for this house…
In doing the reconsideration of value I simply could find no logical reason why that single property had sold for $8,000 more than 3 other sales. So, I went to that property, knocked on the door, and asked point blank of the new owner… ”why did you pay so much more for this house than 3 sales that were just like it”? At first he was taken back somewhat. Then he finally admitted… ”Because my wife likes it here”. Seems it provided a more direct access for his wife to exit the neighborhood and quickly get to her mothers house. I would have never figured that out by studying the market.
So, finally, I can tell you what the market does or has done. I cannot tell you why.
It does seem rather odd, looking back over 45 years in the real estate and appraisals business, that we are still struggling with a definition of what a market is. When I first got into the real estate business I was told that in terms of real estate value there are 3 important things… ”Location, Location, Location.” That is still true for the most part. But, with ever evolving changes in Urban, Suburban and Rural areas, with new subdivisions springing up in the middle of farm land, and old housing being torn down and replaced with new or “almost new” construction, that there are many areas with markets within a market, or, stated another way, a residential neighborhood on which the secondary market places so much weight, there may be 1, 2, 3 or even more “markets” within the same neighborhood. I have several of those in my market area. Homes built in the early 1900’s, some in almost original, run down condition, some that have been extensively rehabilitated and updated, and some that are new construction on a site where a previous property was torn down.
I believe it is time that we take a practical look at what a subject’s market is… a place where buyers and sellers compete, not necessarily a place name.