Ultimately, the market determines the value of real estate prices. Consumers control prices by demand, and prices change the habits of consumers. As prices begin to rise, consumers tend to buy, hoping they secure their desired properties before properties become too expensive. As prices begin to decrease, consumers tend to shy away from buying real estate, as they try to avoid buying property with the chance of future price depreciation.
Market Value is Determined By:
Property Use
Availability of similar properties
Clean title
Demand
The value of an item or service is dependent on the amount a consumer is willing to exchange for another item (usually money for goods or services). The exchanged value of money to products is called the value in exchange. In the context of real estate, the value of property is based on value in use, that is, how valuable a particular property is for the use of the individual consumer.
How Market Value of Real Estate is Determined
Values vary based on how valuable an item is for a specific party. In real estate, market value is the concept used to determine property. Market value refers to how much the market is willing to pay for something in an arm’s length transaction.
An arm’s length transaction refers to the price a property would be sold for in the open market. Market value is calculated by determining how much the value of real estate is under normal market conditions, independent of how much a specific consumer is willing to pay. This means property value is determined by the value an average consumer is willing to pay for comparable property.
An arm’s length transaction is referenced given the following conditions:
Pros and cons of the property are made available to the public and therefore the value is derived from an open and truthful listing of the subject property
The buyer was not acting under duress which is to say they were aware of all components of the transaction and acted accordingly
The sale is a standard listing. Standard means it is not a short sale, auction, the property is not in bankruptcy, and others
Normal listing on the open market without the purchase deriving from a friend or family member which would skew the listing and sold price
Understanding Market Value
Market value is the amount that consumers in the market would be willing to pay. Ultimately the market value is based on demand and how much consumers will pay for that demand. The term commonly refers to the market value of real estate and the value of publicly traded companies.
Determining the market value of real estate, features, and stocks are typically the easiest type of asset, both liquid and illiquid to determine. Market value is oftentimes difficult to determine, typically due to the unavailability of similar assets to compare the subject property to, however ultimately value is determined by demand and consumer interest in an asset. Moreover, the need for appraisers for certain assets makes it difficult to accurately calculate the value of property.
The market value of an asset is typically a result of investor and consumer perception of the importance and scarcity of that asset. For example, if the value of real estate is going higher, this signals consumers to believe that buying real estate is a good investment. Conversely, when values go down, many consumers get frightened subsequently causing values to further plummet.
The growth of the economy, interest rates, and inflation drastically affect market value. When interest rates are low, consumers typically are more likely to apply for financing, thus causing the value of an asset to increase. When inflation levels surpass a healthy level, the price of goods will increase. Growth in the economy gives consumers optimism, thus making them feel wealthier. This increased demand causes values to go up.
