Oh, No! Not An Economics Lesson! Dustin, Stop! You’re Killing Me!

What do you think of Adam Smith and The Wealth of Nations?! B-O-R-I-N-G!  You’re right, Adam Smith’s book is not the most exciting reading on the planet.  It was not exciting when Smith first published it in 1776. It was not exciting when I first read it over a decade ago.  It is not exciting now.  But exciting is not what makes this book worthwhile reading. What makes it worthwhile reading is the fact it is a classic.  And it is a classic since what made it true in 1776 is still true today. 

It is still true that there is an economy because money circulates in that economy, thus fueling its operations.  In his classic (albeit boring) book, Smith explained what it was that made an economy.  What made an economy, what made money flow, was the exchange of goods and services.  If I wanted a loaf of bread, I had either to make it or buy it.  If I bought it, I traded my money for a baker’s loaf.  Money flowed.  To sell me a loaf of bread, the baker had to purchase the flour with which to make it.  That involved a miller.  So the baker provided the miller with money and the miller provided the baker with flour.  Somebody had to grow the wheat the miller ground into flour.  That involved a farmer who traded wheat for money.  And the farmer needed laborers who traded their services for the farmer’s money.

So what brought me, the baker, the miller, the farmer, and the labor together?  I demanded bread and they, via their production chain, provided it. This was true in 1776 and remains true today.  Demand fuels supply, and then supply caters to demand.  So, you say, “Dustin, all that is lovely.  What does that have to do with me, a boots-on-the-ground appraiser?”, a great question actually.  Thank you for asking!

Part of your job, part of your due diligence, is to measure supply and demand for real estate in a particular market at a particular time.  First you measure the general demand and supply for properties in a market. Then you measure the demand there is for properties more-or-less similar to the subject.  (If you think this sounds a lot like SR1-3(a) and (b), congratulations!  You’re right!  It does!).

So, Smith was right (and boring).  An economy is basically a really big marketplace where those who demand can meet those who supply, and they both can satisfy their mutual needs.  We appraisers do not supply a tangible good.  We supply an intangible service, for which clients are willing to exchange money.  One of the tangible goods we supply is the quantity of demand there is for a specific type of real estate, as well as the supply of it.  When there is less of that good while demand for it is constant, its price usually rises.  When there is too much of it, prices drop until sellers are again willing to exchange money for it.      

Now, what happens when you don’t measure supply and demand?  Basically, then, your final value conclusion is nothing more than a wild-ass guess.  A wild-ass guess is even more unreliable, even more non-credible, than the output of an AVM.  And, if what you provide the client is no more reliable, and even less credible, than the output of an AVM, that has not helped the client, who will soon cease to demand your services, no matter how badly you want to supply them.

Our clients demand service and are willing to pay us for it.  Do we provide them with service in the form of a credible value conclusion we duly and diligently formed?  Or do we merely provide them with something they could get from an AVM?  Our appraisal businesses (and therefore our families!) depend on us providing credible value opinions duly and diligently formed.

For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode: 

5 Comments on “Oh, No! Not An Economics Lesson! Dustin, Stop! You’re Killing Me!”

  1. Pingback: Oh, No! Not An Economics Lesson! Dustin, Stop! You’re Killing Me! - Appraisal Buzz

  2. Good little refresher. I think many appraisers should also remember that these principles apply to everything, even appraisal fees!

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