Effective demand differs from desire in that effective demand requires:
Correct Answer
C) Purchasing power to back the want
Effective demand combines desire for a property with purchasing power sufficient to transact on relevant terms. It can be backed by cash or financing; neither a written offer, lender approval in every case nor current residence in the area is universally necessary.
Why This Is the Correct Answer
Option C is correct because, to create economic value, desire must be supported by effective purchasing power. Effective demand is desire backed by the ability to pay on relevant terms. That purchasing power can come from cash or financing.
Why the Other Options Are Wrong
Option A: Approval from a mortgage lender
Option A is wrong because approval from a mortgage lender is not required for effective demand; a cash buyer has purchasing power without any lender.
Option B: A written offer to purchase
Option B is wrong because a written offer to purchase is an action in a transaction, not a requirement for effective demand. A buyer can have purchasing power before making any offer.
Option D: Residency in the market area
Option D is wrong because residency in the market area is not required. Buyers from outside an area can have both desire and purchasing power.
Want plus wallet
Effective demand is a want backed by a wallet, meaning the purchasing power to act on it.
How to use: Use this when a question asks what turns desire into effective demand.
Exam Tip
Look for purchasing power; lender approval, offers and residency are specific situations, not the general requirement.
Common Mistakes to Avoid
- -Treating desire alone as demand
- -Assuming effective demand requires a mortgage
- -Assuming buyers must live in the market area
Concept Deep Dive
Analysis
This question tests the difference between desire and effective demand. Desire alone does not create value; it must be backed by purchasing power. Effective demand is desire combined with the ability to pay, whether through cash or financing.
Background Knowledge
A common framework lists the elements of value as utility, scarcity, desire and effective purchasing power; some texts phrase them as utility, scarcity, capacity for private ownership and demand backed by effective purchasing power. Desire may be unlimited, but it is restrained by the ability to pay. Market analysis focuses on effective demand, meaning potential buyers who can actually transact.
Real-World Application
Many renters in a city would like to own a home, but rising prices limit how many can afford one. An appraiser analyzing demand counts households with the income or financing to buy, not everyone who wants to.
More Market Questions
In market area analysis, what characteristic distinguishes a district from a neighborhood?
Under USPAP Standards Rule 1-3(a), which item must an appraiser identify and analyze when necessary for credible results in a market value assignment?
How does the Fannie Mae Selling Guide define a neighborhood?
Several homes in a neighborhood are vacant and boarded up. Which market force does Fannie Mae classify this as?
Infrastructure investment such as a new interchange typically affects nearby land by:
A city raises property tax rates and tightens building regulations. Which market force does Fannie Mae classify these as?
An appraiser believes, without market evidence, that a nearby group home lowers values. What does Fannie Mae require?
Which three categories are used to report the supply of properties in a Fannie Mae neighborhood section?
An appraiser is asked for a retrospective value opinion as of three years ago. When must the appraiser meet the Competency Rule?
Can mixed land uses in a residential neighborhood ever enhance home values, according to Fannie Mae?
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam
Previous Question
A house sold for $200,000 in one year and $260,000 ten years later, while the general price level rose 30% over the same period. What does this suggest about its real value?
Next Question
Why can asking prices and observed closed-price trends respond with a lag when housing demand weakens?