The Value Impact of New Residential Construction and Neighborhood Disinvestment on Residential Sales Price

By Simons, Robert A.; Quercia, Roberto G. et al. | The Journal of Real Estate Research, January 1, 1998 | Go to article overview

The Value Impact of New Residential Construction and Neighborhood Disinvestment on Residential Sales Price


Simons, Robert A., Quercia, Roberto G., Maric, Ivan, The Journal of Real Estate Research


Robert A. Simons*

Roberto G. Quercia**

Ivan Maric***

Abstract. The topic of neighborhood redevelopment is central to residential appraisal and the lending process. We examine both the effect of neighborhood upgrading and decline, captured by subsidized new residential construction and sustained property tax delinquency respectively, on the sales price of one-to-two family homes. The research uses a two stage hedonic price model of 12,100 individual residential sales in Cleveland, Ohio during 1992-94. Results show a significant positive effect of $670 on the sales price of existing housing for each new unit built in a one-to-two block area. A decrease in sales price of $778 is associated with a 1% increase in the tax delinquency rate. The spatial variability of these effects is also explored.

Introduction

The topic of neighborhood transition is central to the work of the appraiser and the underwriter. Certain land uses can affect the values of existing properties nearby. These effects can be seen as desirable or undesirable depending on whether they affect the value of existing homes in a positive or negative way. Thus, the determination of these effects is a central consideration in the process of appraising the value of properties as well as determining underwriting considerations.

The purpose of this article is to assess the effects of new residential construction and neighborhood disinvestment (proxied by property tax delinquency) on the sales price of existing homes. This is important for lenders and appraisers engaged in central city neighborhoods experiencing new development or decline. This study pertains directly to locales such as Cleveland where new government-subsidized market-priced housing is being built in economically depressed areas where the new housing is substantially more expensive than existing units, and is thus expected to act as a positive externality. This research uses a hedonic price model of a cross section of 12,100 residential sales in Cleveland, Ohio pooled over the 1992-94 period. Most of the new units received development subsidies and were built in declining neighborhoods and/or those with available empty lots.

Previous Studies

The effects of neighborhood factors on the value of nearby properties have been systematically examined in the literature. For instance, the negative proximity influence of underground storage tanks (Simons, Bowen and Sementelli, 1996), landfills (Pettit and Johnson, 1987; Cartee, 1989; Nelson, Genereux and Genereux, 1992) and air pollution (Ridker and Henning, 1967) have been analyzed. A number of factors reflecting a neighborhood's social fabric have also been examined. These include racial considerations (Nourse, 1976; Vandell and Zerbst, 1984; Holmes and James, 1994) and crime and vandalism (Li and Brown, 1980). As a rule, undesirable traits (e.g., pollution and crime) have been found to have a negative effect on house prices, and desirable traits have been found to have positive effects.

There seems to be some consensus in the literature about two aspects of these neighborhood effects, in particular with regard to residential uses (Varady, 1986). First, new housing concentrated in a particular block is more likely to have an impact on property values in the surrounding areas (Segal, 1977). This suggests that there is a correlation between the concentration of a large number of new units and the value of nearby existing properties. Second, even if an effect is present, the geographic impact of most new housing is expected to be limited (DeSalvo, 1974; Dear, Fincher and Currie, 1977; Quigley, 1982; Varady, 1986). These contentions, however, must be taken with caution because they refer mostly to the effect of subsidized housing.

In general, studies have used hedonic price methodology to assess the effect of neighborhood land uses on nearby properties. Hedonic approaches are based on the assumption that the selling price of an individual house can be expressed as a function of a set of components. …

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