Value: What creates, sustains, and drives it?
We all talk about it and deal with it every day. But, if you've never thought about what creates, sustains, and drives value, this post will attempt to explain it.
The definition of "value" varies depending on your authoritative source. For example, Merriam-Webster's online dictionary provides several definitions, including "the monetary worth of something," "a fair return or equivalent in goods, services, or money for something exchanged," and "relative worth, utility, or importance," among others. However, the Cambridge Dictionary defines it as, "the amount of money that can be received for something," and "the importance or worth of something for someone."
However, in the real estate industry, the term "value" has a plethora of definitions such as, "market value," "insurable value," "value in use," and so on, and so on, and so on.
However, it seems to me that none of these definitions explains why something is perceived to have greater worth to one while having little if any to another.
Let's explore these issues ...
Basic economics teaches that in order for any thing to have value, there are four essential components that must coexist. These are:
- 1Useful. In order to have value, an item must be perceived as being useful.
- 2Desirable. An item must be desired.
- 3Available. An item must be available to those who find it useful and desirable.
- 4Affordable. An item must be relatively affordable to those who who perceive it as useful and desirable.
And, if you were wondering about the principle "supply and demand," it's contained within the Available category.
But, while we understand WHAT makes something valuable, we still haven't answered WHY some people will find the same item more or less valuable than do other people.
Or, did we?
Among the four components needed to create and sustain value, the one that drives the level of value one person sees in an item versus the level another sees in an item is the element of desire.
And, because desire is an emotion, it cannot be measured scientifically before an item is made available. It's only after an item is made available can the level in terms of dollars and terms of demand is desire measurable.
A perfect example of how emotion drives value is in the atmosphere of a live auction.
As a real estate broker, I've conducted live auctions for the sale of real estate. And, in one such auction of two luxury single-family homes, one of the homes was so desired by one couple, that upon entering the auction hall the husband declared, that because his wife was "so in love with this house," he was not going to allow anyone else to buy it.
Needless to say, when the bidding was done, this man was the winning bidder. To he and his wife, this house was worth more than it was worth to any of the other bidders at this auction because they desired it more than anyone else.
In the end...
While it's certainly true there are four components that create and sustain value, there can be no doubt that the single component that drives the level of value is desire.