THE ECONOMIC MELTDOWN How to appraise in a free falling market
Depression Economics 101: I get to sound off about the economy. There is an inherent conflict in free market economics between the forces of supply and demand seeking an equilibrium and the forces of competition that produce winners and losers. On one hand, mutual self-interested bargaining results in all interests being served (Adam Smith’s invisible hand) and the other wealth concentrates as to only the victors belong the spoils of created wealth (Malthusian social Darwinism).
Depression Economics 101 continued- In a depression, the forces of competition are clearly in dominance. Wealth concentrates and the losers are forced to seek credit to continue to compete. Eventually, the losers will accumulate more credit than they have assets to secure and then credit availability restricts, homes are foreclosed, businesses are shut down and jobs are lost.
Characteristic of a Free Falling Real Estate Market: • Coercion rather than classic arms-length motivations are driving the market place. Sellers are desperate to escape debt and buyers are vultures. • With restricted credit available, most transactions will be in cash. • Foreclosures, Sheriff’s sales and Auctions will be the main methods of real estate transactions. • Since buyers will have to have cash up front, the number of available buyers will decrease and so will market activity.
How to Find Market (Comps) for a Free Falling Market: • When market activity dries up there are two main ways to expand the criteria to get sales; • First: expand the size of the market area, keeping in mind that an area of market activity probably will have higher value than your subject area. • Second, stay in your market area and go further back in time, realizing that the old values will need a downward adjustment for current market conditions.
How to Find Comps for a Free • Falling Market-cont. • Principle of Substitution will now indicate thatauctions, foreclosures and sheriff’s sales are acceptable transactions. Listings can also be important. • One may have to sacrifice a degree of comparability and bracket the subject with sales that are clearly superior and inferior to the subject.
CONCLUSION: • Be prepared to be creative, expand the market search in time and area, bracket the subject with slightly less comparable sales, and accept unconventional sales that will become conventional when the market depresses. • A free falling market is not non-existent, only altered in the form it takes. Are You Depressed yet?