Academic journal article The Journal of Real Estate Research

Temporally Dynamic Externalities and Real Estate Liquidity

Academic journal article The Journal of Real Estate Research

Temporally Dynamic Externalities and Real Estate Liquidity

Article excerpt

(ProQuest: ... denotes formulae omitted.)

In any market, the liquidity of an asset may be affected by a variety of factors, and it is well established that shocks to liquidity are common in real estate markets specifically.1 Indeed, location is often a key determinant of real estate liquidity; and, while physical location stays the same for a given property, amenities and disamenities around a particular location can change substantially. In this study, we reexamine a known spatial externality or disamenity, registered sex offenders, and their impact on surrounding home liquidity with the goal of using previously unexplored variation in their transience to glean new insights into how this kind of dynamic externality affects real estate markets. Methodologically, this type of spatial externality presents a measurement problem because they can appear or disappear relatively quickly by simply relocating, so the traditional approach of measuring their presence at a particular point in time (e.g., the sale date of a home) may produce misleading or incomplete estimates of the different effects these types of externalities have on real estate outcomes. For example, do nearby registered sex offenders who move in or out after a home is already listed have a different impact than offenders residing nearby through the entire marketing period? And, in the latter case, can decisions about the list price near more stationary offenders effectively compensate, avoiding longer time on market? The purpose of this paper is to exploit the temporally dynamic nature of registered sex offender movements, extending the literature by answering these questions, and providing an initial step toward a more nuanced analysis of temporally dynamic externalities on real estate outcomes.

Following Megan's Law (Sexual Offender Act of 1994), sex offender registries have become easily accessible to both sellers and potential buyers, and the literature has shown that perceived risk associated with the proximity of a sex offender imposes a negative externality on surrounding real estate. Anecdotally, a number of real estate professionals report that they or their clients check the online sexual offender registry when evaluating a property, assessing crime risk along at least one important margin. In fact, as reported in the Richmond Times-Dispatch (Hazard, 2010), a Virginia-based realtor noted that she uses a smart phone app that allows her to show a list of nearby offenders to prospective buyers, because as she explained, "I have been in situations where young, first-time buyers like a house and parents who live elsewhere look at the list and tell their children not to buy the house." Numerous real estate websites and smart phone apps include information about sex offender proximity in neighborhood descriptions, making it easily available.2

We extend this particular literature and the real estate externality literature more generally by examining both the liquidity effects and the listing strategy of homes that experience this externality at different points, and for different durations, of their marketing period. Our paper contains two key results not yet investigated in the externality literature. First, estimates from duration models suggest that sex offenders who move in or out during a nearby home's marketing period are the principle source of the adverse liquidity effect (i.e., longer time on market, on average), given the surprise or shock it presents to the market. That is, the "surprise" of the sudden appearance or disappearance of this dynamic externality and corresponding pricing misalignments play critical roles, which we examine more thoroughly both theoretically and empirically. Second, more static offenders who reside nearby during a home's entire marketing period show a patently different effect, in some cases selling faster than otherwise identical homes not near sex offenders. Understandably, there is no "shock" in these circumstances, where information about the presence of the sex offender is known by all parties throughout the marketing period. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.