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Valuation Theory, the Marshallian Synthesis and Implications to Mark-to-Market Measurements

Valuation Theory, the Marshallian Synthesis and Implications to Mark-to-Market Measurements. Terry V. Grissom Professor of Real Estate University of Washington and Lecturer in Real Estate University of Ulster. Process.

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Valuation Theory, the Marshallian Synthesis and Implications to Mark-to-Market Measurements

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  1. Valuation Theory, the Marshallian Synthesis and Implications to Mark-to-Market Measurements Terry V. Grissom Professor of Real Estate University of Washington and Lecturer in Real Estate University of Ulster

  2. Process • Problem : Economic Foundation of Valuation Techniques and Implications to Theory of Equivalence or Hierarch of Process • Theory: Value Valuation Appraisal • Empirical: Fit of Model Equivalence vs. Hierarchy Comparative & Statistical mark-to-market

  3. Theory • Value Theory [Marhsal (1890/1979) (Friday (1922), Ratcliff (1961, 1965, 1972),Wendt (1974) Grissom (1981,1985, 1986), McParland, McGreal and Adair (2000), Odileck and Unsal, (2009) DeLisle &Grissom (2010)], • Valuation Theory [Marhsal (1890/1979), Mertzke (1927), Babcock (1932), Bonbright (1937), Schmutz (1948), Wendt (1956), Ratcliff (1961, 1965, 1972a), Babcock (1968), Wendt (1974), Graaskamp (1979), Grissom (1981, 1985, 1986). Grissom et al (1987), Grissom & Diaz (1991), Moore (1992), Wincott et al (1996), Scott (1996), Crosby (1999), Crosby and Murdock (1999), Sharpiro et al (2009), Parli & Fisher (2010), DeLisle &Grissom (2010)], • Appraisal Theory [Mertzke (1922), Schmutz (1948, 1956), Kinnard (1966) Ratcliff (1964, 1965, 1972b), Wendt (1974), Graaskamp (1979), Grissom (1981, 1985, 1986) Diaz (1990), Grissom and Diaz (1991), Pomykacz (2009), DeLisle and Grissom (2010)

  4. Value Theory • Value Determinants • Value Premise/Principles • Statistical Concepts (Colwell,1979) (Gini, 1922) (Kummerow 2002) (Grissom 1986) • Equilibrium Concepts (Marshall 1890)

  5. Valuation Theory Measurement and Base: • Traditional –Property Base • Statistical – Data Set or Market Base (Grissom, Robinson, Wang 1987) • Equilibrium – Conditioned Set or Market Base Cannaday and Colwell (1981a, 1981b)

  6. Appraisal Theory Appraisal Analysis comprised of two general decision tools (Moore, 1992): • Methods of standards and measurement; objective • Decision tools Standard/Objectives – (subjective/judgment) Logic: Theory of Equivalence Hierarchy Evaluation Base

  7. Figure 1Marshallian Valuation Construct and Market Structure P SM SSR SI DSR SL PM PI PSR DL DI DSR’ Q

  8. Market Constructs of Approaches • Momentary/current price in Short Run Equation: premised on Supply and Demand • Price is a function of size/quantity and rent Where: Conditional on and inverse relationship of price and quantity

  9. Market Constructs of Approaches • The momentary market is altered by shifts in current supply considering modifications as per land use succession conditions: • This is estimated by the rate of growth in supply based on the neo-classical theorem as formulated by Robinson (1962). This theorem influences various long-run impacts on current expectations across input markets. The variables per market used in this study are conditioned on the weighted effects of growth expectations (SR)as functions of asset market calculus relative to the long-run normal growth rate: SSR= h(SM, SR, QSR|PSR, PM)

  10. Market Constructs of Approaches Short Run Pricing incorporating growth/change considerations and impacts: Change/growth rate: • =gSR= h( Expected Short-Run Price:

  11. Market Pricing Constructs of Approaches Hayek: Supply price /roundabout discounting affects Intermediate Valuation Phase: Where: NOI = f(R, Ro|t, GIM) And NOI = net operating income ( rent less all expenses and deductions) OER = operating expense ratio, derived from OER = 1-(Ro X GIM) to derive a market developed operating expense ratio (OER). See Triece equation GIM = a gross income multiplier (Price Gross Income/rent).

  12. Market Pricing Constructs of Approaches Demand Pricing conditioned on price and rent associations: The intermediate equilibrium value (VI|E) occurs where VI|D - VI|S = 0; in the equation form where: [I|D - D VI|D + Ri|D] - [I|S + S VI|S] = 0 Using the relationship VI|D - VI|S = 0; then Equation 5 is restated as: [I|D - I|S] + VI|E (S- D) + Ri|D = QVI|E   VI|E = QVI|E - Ri|D -[I|D - I|S] (S- D)

  13. Market Pricing Constructs of Approaches Long Run considerations (distributive theory): • SLR = f(|R, L|w, K|i, |)|,  Where: = land as a factor of production compensated by rent R, a market price for the use of land or a cost in the process of production/construction L = labor compensated with a wage (w) K = capital receiving a return of (i) and = entrepreneurship, which is compensated with profit,  which is treated as a cost of production in the creation or development of an asset. The factors are conditional on the level of total resources  and the state of choices of development technology, , efficient, inefficient, sustainable or traditional.

  14. Market Pricing Constructs of Approaches • The ability to link long-term normal price and cost supports the form of the long-run supply and demand schedules based on Demand and Supply Equations respectively: Demand Supply Equilibrium State: P LR|S - P LR|D = 0

  15. Empirical • Fit of Theory/Model-Equilibrim: Table 2a/b and Figures 2-7 • Statistical Distributions- E(V), Ve, Vp: Table 3 relative to Equilibrium values • Tests of Equality (Marhall’s Time Frames) Theory of Equivilence Hierarchy : Table 4 • Comparative Statics and Marginal Distributions (Mark-to-Market): Table 5

  16. $275-280 $274

  17. Valuation Theory Model Tests-Empirical

  18. Valuation Theory Model Tests

  19. Valuation Theory Model Tests

  20. Valuation Theory Model Tests

  21. Valuation Theory Model Tests

  22. Valuation Theory Model Tests

  23. Appraisal Theory: Equivalence vs Hierarchy • Empirical Analytics suggest Equivalence concept is weaken • Samuelson and Comparative Statics (1946-1947): offers statistical critique of comparative statics in relation to marginal analysis. This offers support for or rejection of observations. This is achieved in a 3 step process where: • Samuelson builds on Stigler’s argument that a goods endogenous attributes are proportional to the quantity of the M good itself. This allows the price of the goods to be used to make maximum/minimum decision calculations. Goods can be specified by unique value determinants and attributes in the form:

  24. Appraisal Theory: Equivalence vs Hierarchy M1is a minimum aggregated productivity attribute measurement allowed or acceptable per asset. A1iQi is the attribute quality measurement observed per unit in the market. • The assumptions of the endogenous attributes as defining the asset or good allows the price or cost estimate to specified as Pi = C|P1Q1+C|P2Q2…C|PnQn. • This allows the cost combination in two price situations to be compared to the extent PiPj and deduce the level of price changes associated with optimal changes in quantities associated in each price situation.

  25. Appraisal Theory: Equivalence vs Hierarchy • In this context the corresponding price and quantity changes in the momentary market are stated as PM and QM and PSR and QSR in the short run market. • The price-quantity pairings in the intermediate and long run markets are indicated by I and LR. By definition: PMQSR PMQM and  PSRQMPSRQSR • Adding these inequalities and rearranging terms produces: (PSR-PMR)(QSR-QM) = P1Q1P2Q2…PnQn 0 This equation allows the comparison of the equilibrium positions in a comparative static format. This enables a direct comparison of the equilibrium positions as specified for the momentary, short-run, intermediate and long-run market pricing points. Paasche/Laspeyres Indices

  26. Appraisal Theory: Equivalence vs Hierarchy • With the assumption of constant utility (U), the price differences can be carried further to a dynamic construct consider the integral format: The above equation reflects a Hicksian demand construct, as such for the equivalence theorem to hold, the Hicksian demand structure has to hold across market periods, while a hierarchy format is consistent with the Marshallian construct with additive utility inferred. The test is determined by the percentage difference of the value estimate from the current market standardized as one (1), with the test statistic of 1-.

  27. Conclusions • Good Fit of Models across Economic phases • Strong argument for hierarchy of valuation techniques (given the partial equilibrium construct that underlies the appraisal process based on the economics of the Marshiallian synthesis. • though reconciliation process is reasonable, for it to hold significant procedure and assumptions must be developed in Sharpiro et al (2009) • Mark-to-market standards supported if perspectives are designated as • Potential to condition pro-cyclical concerns • Suggest the focus on using market rather than subject as base of analysis (or integration: See Grissom, Robinson and Wang (1987) • Further benefits to be gained by employing calculus of variation construct and error correction models as alternative to structural equilibrium procedure

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