Lately I’ve been struggling to reconcile two seemingly opposing views in the appraisal process. How do these two views coexist ? We learned the basic economic theory that if two houses are identical, save for one key feature like a fireplace, we would pay more for the house with the fireplace. Makes sense. And when it happens often enough we appraisers can support the case that the “typical” buyer in this marketplace will pay $XXXX for the fireplace amenity. We say the fireplace adds $XXXX value in this market.
The challenge is that our appraisal theories presume rational behavior on the parts of buyers and sellers in this local market, while most of the merchandizing of real estate is calculated to encourage irrational behaviors. Emotional behaviors triggered by the colors in the kitchen, by the sun pouring in the transom windows, by the suggestion made by the listing agent that this house won’t last long.
Appraisers act as if buyers and sellers are rational calculating machines, but the truth is that realtors didn’t price the house using economic theory and the buyer isn’t agreeing to the price because of economic theory. The truth is that “typical” buyers are deciding to buy based on their hearts not their heads.
One potential buyer wants the house because of the school district. Another potential buyer wants the same house because of the shape of the yard. Another wants it because the basement is perfect for their home-brewing hobby. And another wants it because the kitchen is sunny. They aren’t paying $XXXX more because it has a fireplace – but that is what we appraisers cipher out from our custom selected paired-sale. The “typical buyer” is really an economic concept we overlay on top of the aggregate of individual buyers in order to justify our science.
With all due respect to David Brooks – “When the economy is about stuff, economics resembles physics. When the economy is about emotion & ideas, economics resembles psychology.” We appraisers then are not so much like scientists sifting through the factual evidence, as we are Alienists trying to explain the reasons behind the actions of buyers and sellers.