Real Estate: The Inefficient Market

The bottom line is that there is no reason to assume that the real estate market is even close to efficient. You may want to buy a house if you love it and can afford it. But remember that you cannot safely rely on “comparable sales” to judge that the price is fair. The market isn’t efficient enough for that.

ROBERT J. SHILLER
Sterling Professor of Economics, Yale University

The real estate market is not an efficient market, nor rational. Prices vary across the board for an infinite number of reasons. One person may be more motivated to sell than another, while another person may be more educated and well advised upon placing an offer for purchase.  Brokers advise price setting for their clients which can furthermore vary based on the level of expertise they are bringing to the table.  Trends are nonetheless evident and honest differences do indeed exist, although all are dependent upon market variables.

Emotions are a key driver of consumerism, and buying a home can often become an emotional process.  Arbitrary offers for homes are common, both high and low, which defy the cost of land, comparative construction and remodeling cost differences. Diversity of the home styles, neighborhoods, and external influences are only a few variables that overlap one another in a complex weave of obscurity. Different market conditions and trends act like weather, shaping the behavioral landscape of buyers and sellers and the spectrum of possible responses.

Appraisers are taught to analyze data and assert objectivity. The appraisal process attempts to find scientific solutions to the problems to be solved. Some assignments have more clear indicators than others. Mostly, estimated market responses are at best narrowed through sound methodology and expert observations on behalf of the educated appraiser, then reconciled.

The appraiser is simply the messenger, not the creator of the market place yet, he/she can implore fair and educated judgement when necessary. The work of the appraiser, in short, is to establish a proper scope for the assignment, and gather enough relevant/useful information to lend a credible opinion of value.