Homogeneity: What’s it Worth?
There is a conceptual thread in real estate appraisal theory that holds that value is maximized when all of the competing properties look exactly like the subject property. That is, value is maximized when assets are identical.
Although not explicity stated in the valuation texts on my shelves, I believe the principle of homogeneity purports that information asymmetry is minimized when the differences between properties, particularly the subjective “touchy feely” ones, are removed. That is, when all of the properties in the neighborhood are identical, there is very limited room for misinformation, deception, and misinterpretation. So, theory holds, a manufactured housing community (i.e.,mobile home park) of all single-wide homes would more efficiently and effectively create value than a manufactured housing community with a mix of double-wide and single-wide homes, ceteris paribus.
So, why doesn’t everyone live in exactly the same house? Value, in theory,would be maximized if they did. Is there value in differences — value that outweighs the costs of information asymmetry and market friction?
I contend that while homogeneity captures a premium for market efficiency, there is little room for creating extra value through differentiation, and, I observe, differentiated products and services carry a premium to the extent abnormal profits may be realized for the market as a whole.
Why? …because differentiated products and services meet better the particular needs of particular consumers, and particular consumers are willing to pay a premium to have their particular needs and wants met (hence, not all houses have “realtor beige” walls).
Statistically, I posit that the mean value is to the right of the median value of differentiated products, particularly of real estate properties of a given class in a given market. And what this tells me is that the discerning consumer is willing to bid up the average price for differentiated products; that is, they pull the home value distribution to the right as they incrementally open their wallets for the “oo’s and ahh’s” of different colors, styles and layouts.
I am all for color — as long as it is not purple, pink, yellow, blue, brown, green….I guess I like beige?
Posted on Sat, May 15, 2010
by Timothy E. Moffit