Elements of value and the forces that influence value

Value, price, and cost

Market value is the most probable price a property should bring in a competitive, open market under conditions of a fair sale: informed, willing parties, reasonable exposure, and no undue compulsion. Price is the amount actually agreed upon; cost is the expenditure to create or acquire something. Neither necessarily equals market value. A costly improvement may add little value if buyers do not want it. An appraisal is an opinion of defined value as of a specific date; market conditions can change after that date.

Four elements of value: DUST

Demand means desire backed by purchasing power. Admiring a home without the ability to pay is not effective demand. Utility is usefulness: how well a property satisfies a need or want. Scarcity is limited availability relative to demand, not simply rarity. Transferability is the ability to convey ownership rights. Restrictions or defects affecting the rights buyers can receive can reduce marketability and value.

The elements work together. A rare but unusable parcel may attract little demand. A useful building in an oversupplied market faces competition. These elements explain why a property has economic value; they are not four amounts to add together.

Four forces that influence value

Social forces include population changes, household size, and preferences about how people live. Economic forces include employment, income, credit availability, interest rates, and construction costs. Governmental forces include zoning, taxes, building regulations, and public services. Physical or environmental forces include location, terrain, climate, access, natural hazards, and the condition of surrounding development.

Follow the cause through to buyer behavior. Job growth can increase purchasing power and housing demand. Higher mortgage rates can reduce the loan buyers can afford at a fixed monthly payment. A zoning change may change permitted uses. Flood exposure can reduce utility or increase ownership expenses. More demand with unchanged supply tends to put upward pressure on prices; more supply with unchanged demand tends to put downward pressure on prices.

Real situations can involve several forces at once, so classify the particular cause named in the question and avoid treating a single influence as a guaranteed price change. Remember the distinction: DUST identifies elements supporting value; social, economic, governmental, and physical forces describe conditions that change them.