The Problem of Valuing the Unique House
One of the strange things about residential real estate valuation is the notion of “comparables.” Generally, speaking, real estate agents and appraisers rely on the notion that there are similar houses nearby which have recently sold, and which can be used to value the present house.
This logic works for places like Levittown, NY and other planned communiities. But what if the house in question is unique? What if it has historic importance and unique architectural characteristics that differentiate it from all other sales in its immediate area? How, then, can you use the comparables approach to valuation? The easy answer here is that you can’t. And this creates some interesting problems, as Felix Salmon explains:
Ngai and New say, reasonably enough, that “there is a certain perversity about making a house unbuyable, even to two eager would-be purchasers, for fear of it being unsellable in the future”.
More generally, this shows a mortgage system broken in all manner of different ways.
For one thing, everybody is far too rule-bound, still. If a lender is worried about the difficulties involved in selling a round house, then it should be able to ask for a higher downpayment, or require a slightly higher mortgage rate, to make up for the extra risk. But no one seems set up to be able to do that.
This story is important for reasons other than the mere curiosity of buyers being unable to buy the house because it is round. The reliance of mortgage brokers and their appraisers on the notion of comparability and similarity in houses treats houses as if they were fungible securities likes bonds or equity or currencies. But, as any homeowner can tell you, each house is a unique beast. Just because your house is a two-bedroom, two-bath with a garage and is situated on a quarter of an acre does not mean that the house down the street which has similar statistics is really comparable in any meaningful sense. Your house might be newer. The other house’s roof may have been replaced last year. Your foundation may be cracked. The other house may have brand new plumbing and a recently updated electrical system. Et cetera.
In short, the notion that different houses are in any meaningful sense comparable to one another is an intellectual shortcut. Basing valuations on shortcuts is a recipe for financial ruin. Valuations should be more sophisticated than mere comparables. There are situations where the comparables approach does work, the aforementioned Levittown being an obvious example. But it is too blunt a tool for certain areas and houses, and lenders should develop a way to distinguish amongst these various circumstances. Blunt tools often obscure complex issues.
(Incidentally, a side note for architecture buffs: The house pictured at the upper-left hand corner of this blog post (viewable on the front page), is Frank Lloyd Wright‘s Robie House, which can be seen as a precursor to his famous Fallingwater.)