25 July 2007

how much should used furniture cost?

In an online forum which I frequent, someone suggested that the price of used furniture decays exponentially. So if I have a desk which I bought today for $100, and I want to sell it a year from now, it'll fetch $80; two years from now, $64, and so on, assuming that it depreciates at twenty percent per year. (The "twenty percent" is a number I just made up so that the arithmetic would be easy.)

But a flaw in this argument was quickly seen. For one thing, furniture depreciates essentially immediately the moment you take it out of the furniture-dealer's showroom. (One might make an exception for IKEA; first it depreciates, because you take it out of the store, then it appreciates because you put in some of your own labor in transforming a bewildering array of pieces of wood into something you can actually sit on, sleep in, or put your possessions in.) This was ascribed to the fact that when you go to a furniture store, you have to do a lot less work to find the particular piece that suits your needs than if you're trying to find such an item on Craigslist.

Then another model for the rate at which furniture depreciates was claimed: namely, that furniture depreciates by some fixed percentage immediately when it leaves the store, and then at a constant percentage rate per year thereafter. (The depreciation percentage upon leaving the store, at least for IKEA goods, could probably be determined by watching Craigslist; a surprisingly large amount of the IKEA furniture for sale there is said to be less than one year old. Also, a surprisingly large amount of the furniture for sale on Craigslist is IKEA; I suspect this is because the type of people who sell things at Craigslist are the same upwardly mobile, transient types that buy things at IKEA. Note that I have done absolutely no market research on this subject, unless you count "what kind of furniture do my friends have?" And I didn't even actually ask my friends, I asked myself.)

But there's a problem with this one, too. I am sitting at a nineteen-year-old kitchen table. I know it is nineteen years old because my parents bought it when they (we, since I lived with them at the time) moved into a new house in 1988. I inherited this kitchen table from them in 2005, because they moved into a house for which they wanted new furniture at the same time as I needed a table. I do not know how much they paid for it, and I do not know how much it is worth. However, I suspect that if it was worth, say, $400 when it left the showroom in 1988, and $100 right now, then it was probably worth less than $200 in 1997. (Pretend that 1997 is exactly halfway between 1988 and now.) That is, I suspect it depreciated by a larger percentage in the first half of its lifetime than in the second half. In fact, I suspect that by now this table is not depreciating at all. The exponential decay also suggests that in a reasonably short amount of time my table will be worth nothing, which also seems silly.

(Incidentally, all I can find online about furniture depreciation is information for tax purposes for furniture owned by businesses; the scheme used there assumes that furniture depreciates in a straight-line fashion over the first seven years of its life. This is so far from the obvious reality that I will not even take it into account.)

Why do I say this? Well, my table looks like it's in good shape. And let's say that you know it's twenty years old. There's no reason why it shouldn't hold up for another, say, twenty years -- the fact that it's been around this long tells you that it's built well. (I know I'm invoking the Copernican principle here, which I've criticized before in reference to space exploration, but furniture isn't space exploration.) So this should make you be willing to pay more for it; if you are buying a table, the amount you are willing to pay for it is roughly how much you would pay to have a table for a year, times how many years you expect the table to last. (If you sell the table before it stops working, this still applies, because the price you can get for it is the result of the next buyer making this same calculation.) As time goes on, the table accumulates scratches and dings -- making it worth less per year -- but its life expectancy might go up. (I know this seems somewhat paradoxical; you might think that a table has, say, a 5% chance of breaking in any given year -- a table breaking might be a Poisson process. But I'm claiming that the fact that this table is still in one piece should lead you to believe that it's a Good Table. I'm saying this mostly because it seems to lead to results about the used-furniture market that feel right.) When a piece of furniture is new this first effect is the larger one; when it is old the second effect is the larger one. At the point at which the second effect is larger, that's when the price of the thing starts going up.

People also attach a certain value to "antique" furniture, which would also raise how much they're willing to pay for it; however, I don't think my table is anywhere near old enough for that to matter.

As it turns out, I live above a used furniture store. However, I suspect that the owner of that store doesn't like me much, so I don't think I'll ask him what he thinks about this.

10 comments:

John Armstrong said...

Of course that statement is a gross oversimplification. However, as a first-order approximation it's not bad.

It also plays nicely with the well-known exponential behavior of delayed gratifications.

Gregory said...

There's one nagging bother for me about this. I'm not sure how closely linked the 'value' of a piece of furniture is to 'the price people pay for it'. This contradicts Adam Smith's adage that the value of something IS what people will pay for it, but really, when have you heard someone say "I loved that table, but I had to sell it when I looked at the resale value". People sell furniture when they move or when they decide to buy new furniture, not when the market dictates it. Therefore, sale prices probably vary significantly, and their average might not be close to the actual 'value' of the tables.

On an unrelated note, John's comment on delayed gratification reminded me about one of my favorite Wikipedia articles: Hyperbolic Discounting. The underlying idea is that people display a consistant preference for earlier payoffs that can't be explained by any exponential model. People apparently value something inversely proportional to how long they have to wait for it. Its funny because most people seem to know that things devalue exponentially, but viscerally, they do inverses instead.

This has two interesting consequences. The first is straightforward, that people tend to over-value very short term payoffs; this should be no news to anyone who has ever met a person. The second is more subtle... it implies that people overvalue things in the very long term as well. That means that someone using this visceral method to compound low-scale risks to their payoff over long terms might vastly underestimate the total risk. I wonder if this can affect things like people undervaluing a table that will last 20 years, compared to a table that will last 5 years.

Isabel said...

Gregory,

the market doesn't dictate when people sell their furniture, but it does dictate how much they get for it when they do sell it. I'm not going to sell my table, but I assume that if I did try to sell it there's a certain amount I could get for it, and that's what it's worth. (Of course, there's a huge amount of measurement error here; I am not under the delusion that if I tried to sell my table a hundred times in a hundred parallel universes I'd get the same price every time.)

Of course, I am not an economist.

John Armstrong said...

Adam Smith's adage is correct, but it's a tautology.

Economics is extremely local. All that can be said for sure is that when a transaction takes place, bargainer A offers set X of goods and services, while bargainer B offers set Y. X and Y contain all goods and services, no matter how ephemeral, and they are very specific. X may not contain "a table" -- it contains "this table". In that case we can say that A values Y more than X and B values X more than Y, otherwise the transaction would not take place.

There is no such thing as "value" except at the specific moment of a transaction, and then it only exists relative to every single possible variable.

Everything else is theory.

Rustic Furniture said...

We can say nothing about it. It depends on the condition and strength of furniture.

Anonymous said...

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I don't mean this in a bad way, of course! Ethical concerns aside... I just hope that as memory becomes less expensive, the possibility of transferring our memories onto a digital medium becomes a true reality. It's one of the things I really wish I could experience in my lifetime.


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SEO Action said...

I think it depends on how old it is ,its strength and durability too.

Recycled Wood Furniture said...

I agree with guy above. It really depends on strength and how old it is?

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