Club Good Influence on Residential Transaction Prices
Hansz, J. Andrew, Hayunga, Darren K., The Journal of Real Estate Research
We examine residential real estate transactions in a market where an additional property right to a club good may have an influence on prices. We find that for single-family property, the market capitalizes approximately 50% of the full value of the extra property right. For condominiums, the amount reduces to approximately 25%. While these amounts are positive, they clearly are significantly lower than full value.
Real estate is fundamentally a private good-the economic definition of a private good being a good that is rivalrous and excludable. Rival goods are those whose consumption by one party prevents simultaneous consumption by a different party. An excludable good or service prevents people who have not paid for it from enjoying the benefit. At least in the United States, the orthodoxy of real estate ownership is the owner's rights of exclusive possession, use, and disposition of real property.
Despite the inherent private good nature of real estate, there are some instances when additional rights and responsibilities attach to real property such that the private good includes club good features. In comparison to private goods, club goods maintain excludability but are non-rivalrous. That is, multiple parties can consume the club benefits but are only able to do so based upon entrance into the club. General club good examples include NATO and cable television, as well as social and religious organizations.
Instances of real estate club goods include historically-designated property, retirement and gated communities, and developments employing strict covenants and restrictions. In these real estate examples, members adhere to restrictions or requirements (e.g., age) to gain entrance into the club and accordingly enjoy the benefits of membership. Do and Grudnitski (1997), Langbein and Spotswood- Bright (2004), and Coulson and Lahr (2005) are example studies of club good real estate.
We consider another traditional club good in this paper-the country club. Specifically, we investigate real property ownership in the Village of Pinehurst, North Carolina. The area was developed by and around the Pinehurst Resort and Country Club (Pinehurst C.C.) and world-class golf courses.1 In addition to offering a singular golf experience, Pinehurst C.C. has a membership structure that makes for unique economic study (see Appendix A for background information and current aspects of Pinehurst C.C.).
To join Pinehurst C.C., prospective members must own real estate within the incorporated limits of the Village. Upon deciding to join Pinehurst C.C. and purchase property within the Village, a prospective member faces another decision. Dispersed throughout the Village are homes that hold an additional property right that allows a member to pay a $12,000 transfer fee to join the country club. Alternatively, if a prospect buys a home without the extra property right, they must pay a $40,000 initiation fee to join. This $28,000 difference between the two amounts is easily observable in the Pinehurst C.C. fee schedule.
Accordingly, our main research objective is to investigate the value the market places on the additional property right; the answer being not entirely clear ex ante.2 On the one hand, the $28,000 savings is public information and those homebuyers that will subsequently join Pinehurst C.C. should bid up to this amount for the additional right. On the other hand, there are traditional residential purchasers who live in the Pinehurst community who do not desire to join the country club but still desire to purchase a home in the Village. Clearly, the $28,000 savings is of little value as they will not realize it without joining the club. Alternatively, there may be other property attributes that causes a homebuyer, who does not intend to join Pinehurst C.C., to pay a property right premium (e.g., a non-golfer valuing a golf view).3
These various scenarios suggest a quantitative analysis that isolates the value of the additional right relative to the $28,000 savings. …