The simple answer to this question is that market value is simply what a buyer in willing to pay.
Around here, specifically, we've seen values go up 14-18% for several of the years between 2002 and 2006. We've also seen the markey slide backward 6% in some years. No simply calculation can adequitely substitute for an appraisal and a proper going over in the free market, which is what you have when a property is listed for sale. To use your example specifically, ie: purchase in 2004 for $240k. Do nothing to improve and increase by 10% for 2005, '06, and '07 = $319,440. Even if you do that backward to 2002 you only come up to $386,522. A seller would fire sale the property at $450k and take $425k before they'd accept an offer obelow $400k.
Say that a buyer wanted to hedge their bets, that values might continue to decline: first you'd do an analysis or appraisal to determine the value today, then determine how much you think the market might slide - then make an offer.
Buyers say, "well the seller got it far a song 'X' number of years ago - they're making plenty" all too often. The value of the property is determined by the market, not a set number every year. (although that would certainly make my job easier). Don't forget that demand usually picks up again after the first of the year too.... more