What is a key principle that underlies real estate appraisal?

The correct principle is based on the fundamental economic concept of supply and demand, which plays a crucial role in determining property values in real estate appraisal. This principle asserts that the value of a property is influenced by the relationship between the available supply of properties in a given market and the demand for those properties from buyers.

When demand exceeds supply, prices tend to rise, reflecting the competitive nature of buyers seeking limited properties. Conversely, when supply surpasses demand, property values can decline as sellers may need to reduce prices to attract buyers. Understanding this dynamic helps appraisers to assess how much a property is likely worth in the current market conditions. By analyzing trends in supply and demand, appraisers can provide a more accurate valuation that reflects current market realities.

While the other concepts like the cost approach, market trends, and investment return are important considerations in real estate appraisal, they are often influenced by the overarching principles of supply and demand. For example, market trends may reflect changes in supply and demand over time, and the cost approach helps establish a value based on the cost of replacing a property, but these methodologies do not inherently capture the economic relationship that supply and demand directly portrays.