Sunday, September 13, 2020

Value and Salability

I've been puzzling over some recent learning experiences about economic value. I'm sure all of this would be incredibly banal for an economist. But there are plenty of known economic truisms that even educated people never connect with.

For example, I've paid my bills for years via the brutally simple strategy of buying Apple stock whenever it goes way down and selling whenever it goes way up. There's nothing clever about it, yet I don't know anyone else doing it. Savvy investors execute far cleverer strategies, making less money at greater risk. Simplicity often escapes notice, even by - especially by! - smart people.

With that in mind, I have some simple observations.


I bought my current house despite two expensive issues which the previous home owners couldn't afford to fix. They lowered the price accordingly, and while I finally came along and bought it, it had sat on the market for a good long while. This should have been a premonition!

So now I'm getting ready to sell, and had to decide whether to empty my bank account to resolve those issues or to simply pass along the discount. And the reality of it became suddenly clear to me. I could try to sell a house saddled with asbestos pipe insulation and an unsightly exterior full of curling lead paint (impossible to repaint without much exorbitant work sanding away in HAZMAT suits). The house looks like hell, and "asbestos" is a scary word, but, no problem. I could just mark down the price. It's all the same in the end, no?


Houses aren't soybeans or widgets. The housing market doesn't respond rationally because it's not a faceless mob. There is a limited pool of buyers, all subject to emotion. Most don't want asbestos or ugly peeling paint at any price. They'd rather avoid the hassle even if I discounted the bejesus out of it. Serious issues, even steeply discounted, would repel most prospective buyers, who don't want a fixer-upper at any price.

Let's say I offered you a late model car that had housed a dead body for a few weeks. It stinks and the interior's stained. If the car were normally worth $25,000 but I offered it to you for $6000 with the assurance that you could have it cleaned and deodorized for $19,000, would you buy? What about $5000? $4000? $800?

That's an extreme example, but you get the idea. Every issue - every nose-wrinkling sub-optimality - filters out a swathe of prospective buyers, regardless of discount. And there is not an infinitude of buyers. So your house could sit unsold for years despite a perfectly fair price, though a misreading of economics might make you think that result simply doesn't happen.

Even extreme discounting would have limited effect. Most buyers want a nice house in nice condition that looks nice and presents no obvious headaches. Faults, even priced-in, require a fault-tolerant buyer, which is an edge case. As you increase your discount, you're still seeking edge cases the whole way down. There’s no price low enough to attract mainstream buyers. It takes a certain type of person to buy a corpse car at any price!

So...I painted the damn house (using lead encapsulation rather than abatement, a compromise solution with no sanding - the hazardous part - but they just scrape, power-wash, and encase remaining lead paint in a thick primer that lets new paint stick. The result is not super smooth, but it looks ok and costs half the price of full abatement) and I had the asbestos removed. When I sell the house, I'll ask full price, which would repay my outlay with, alas, no profit for my substantial hassle. But it will be attractive to 100% of the market rather than just to problem-tolerant bargain hunters. So I'll save hassle and delay. It will actually sell, which is more than a minor consideration!


On a similar tack, one of the first things newbie coin collectors need to learn is to ignore pricing lists. Well-respected sources might value your 1931-S Lincoln wheat cent at 87¢, and this may be correct, but you will never, ever, get 87¢ for that coin. It's an accurate value, but not one you can get - and the difference is absolutely not just semantic.

87¢ would be the average price of many transactions, nearly all involving dealers who can assure customers that the coins are genuine, and, for example, have never been washed (which drastically reduces value, but you need to be trained to spot it). If you were to spend $35 to have a grading service authenticate, grade, and encase the coin in a plastic slab sealed with hologram stickers, you might be able to sell it for $35.87 on eBay (though you'd lose money after paying shipping and eBay transaction costs). But, even then, it will sit forever on eBay because, while the price is correct, no one wants a stupid circulated penny that badly, except for rare and extenuating circumstances (i.e. circumstances which, in aggregate, led to the 87¢ valuation you found in your price list!).

To be sure, the coin's worth 87¢. You just can't sell it for 87¢, exactly the way my house is worth $X minus paint/asbestos cost...but no one will buy it. Value and salability are different things. Greater value increases salability, but it's rarely linear, much less predictable. So never assume you can simply adjust price in order to sell stuff. Economics, it turns out, don't actually work that way.

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