The Personal Property Appraisers Post

By Robert J. Corey, Ph.D.

Every appraiser faces a choice in the selection of comparables. As a rule, the best comparables are current comparables. However, as so often happens, the best choices of characteristically equivalent properties can have long time intervals between the date of the price realized and the date of the current valuation problem. Without market data adjustment, the age of the sale can lead to an apple-to-orange value conclusion. In this post, I would like to explore the use of index numbers as one example of an objective “age of sale” adjustment technique.

What are Index Numbers?
Index numbers are quantitative measures of the change in prices over time. The most basic form of an index expresses the ratio of the price of a specific product or service in one period to the price of the same product or service in some other period. This simple index, called a “price relative,” is the ratio of two prices. Price relative illustrates the basic concept of index numbers but fails to solve the appraisal problem. Antiques and decorative arts are not commodities like gold or soybeans. Each object sold is to some degree unique and seldom provides the purchase and resale price needed to construct a repeat sale index like that developed in the Mei Moses® fine art indexes. We need an index that is a bit more sophisticated and flexible for our purposes.

Consumer Price Index (CPI)

The U.S. Bureau of Labor Statistics maintains the consumer price index (CPI). The CPI is a general index measuring the average change over time in the prices of a wide variety of consumer products. The CPI measures the purchasing power of consumer dollars by comparing what a mix of products and services costs today with the cost of the same mix at an earlier time. As a general inflation indicator, we can assume that changes in the CPI reflect inflation in the cost of antiques and decorative arts purchased by the average consumer. (To Read the Rest of the article click the Read More Link below)


We can use the CPI to adjust the price realized by out-of-date comparables to show the effect of inflation on today’s likely purchase price. This method of adjustment expands the choice of comparables by allowing the calculation of the dollar amount needed to adjust prices from an earlier recorded transaction to the date of the current valuation. Though the CPI has its weaknesses, it remains the most popular index used as a means of adjusting dollar values. There are numerous CPI calculators available for use on the Internet.

http://cpi.memphiscapital.com/


Major Market Indexes

According to the U. S. Department of Labor, total revenues for the antique and decorative arts market are cyclical as are the average prices of the more common antique merchandise. The price of second and third tier quality antiques tends to move in line with stock price fluctuations. Prices realized for very expensive items are more varied, paralleling the rise and fall of the stock market with a six-month lag time.

We can make use of major market indexes such as the Dow Jones Industrial Average Index, NASDAQ Composite Index, and/or the S & P 500 Index to adjust further the value of out-of-date comparables to account for market fluctuations. By charting the percent change in market indexes using the out-of-date comparable price realized date as a base or zero point and the current valuation date as an end point it is possible to determine the gain or loss needed to further adjust the CPI value associated with a comparable. This may sound somewhat difficult but again, the Internet provides charting software to simplify the task.

http://moneycentral.msn.com/investor/charts/chartdl.aspx?Symbol=%24INDU


Example of Objective Price Adjustment

Suppose you contract to appraise a Georgian inlaid oak Welsh Dresser, mid-18th century, the cornice with dentil inlay and scalloped frieze, side compartments and door with shell inlay, base with deep frieze drawers, star inlaid pendant, and cabriole legs, ending in pad feet. A search of auction results within the last few months is unlikely to yield evidence of the sale of a wide selection of close comparables from which to choose. However, you note that on October 6, 2007, Neal Auction Company of New Orleans sold at auction a qualitatively similar and characteristically equivalent property for $7,931 including buyer’s premium. Before launching into a value ranking analysis of this potential comparable to determine its quality and condition relationship to the subject property we need to adjust the price realized to reflect how inflation and market fluctuations have influenced the value of this sale over time. Making use of a CPI calculator we find that inflation has driven the original price realized up 3.45% to $8,204.89 in today’s dollars.



Turning to the calculator for major market indexes, we can create a chart to illustrate what the market has done to our original $7,931 since its realization in October of 2007.




A quick glance at the resulting chart indicates that the major market indexes have all fallen in the neighborhood of 30% to 35%. Utilizing the objective information provided we can than calculate that the out-of-date comparable price realized of $7,931 has increased 3.45% as a result of inflation and decreased 32.5% in a falling market. We conclude that in today’s market the comparable in question would likely command a price of $5,627.00 including buyer’s premium.

Adjusted Price Realized = ($7,931 + 3.45%) - (32.5%)
($7,931 + $273.62) – (2,577.58) = $5,627.04


In conclusion, too often current comparables for unique properties are unavailable. Appraisers must rely on the use of less than desirable comparables to establish market value. The long time intervals between the date of comparable transactions and the date of the current valuation problem can result in a flawed value conclusion. The use of objective market data makes it possible to expand the best choices of qualitatively similar or characteristically equivalent properties to include out-of-date comparables. A note of caution: not all subject property categories move with the market indexes. Markets are mysterious entities subject to such unpredictable influences as investment speculation, availability, and social fad and style. Thus, index-based adjustments do not always apply. Nevertheless, such exceptions do not give the qualified appraiser license to ignore the norm. An infusion of objective facts for value consideration never hurt an appraisal. The balance between the use of objective market data and the qualitative judgment of a qualified appraiser brings together the certainty of objective fact and the connoisseurship and experience fundamental to the discipline.