The eight components of housing value
I wrote the original piece, "The five components of housing value," early last year, based on consideration of lagging housing values in certain parts of metropolitan areas such as Greater Washington or Atlanta. While many studies seem to want to attribute this to structural segregation, and while I think that's an element, I also think it has to do with broader "place value" considerations.
My sense is that in many of these Atlanta-area communities, like in Prince George's, new housing districts weren't built within a wider framework of civic and community amenities and urban design/urban form.
This is in part a failure of planning in that they built houses but not housing as an element of more complete communities, and housing/a stand alone subdivision is less resilient on its own when it comes to responding to exogenous shocks to the system.
Earlier this year, I realized I didn't include the land intensification (exchange) value of a residential property as a separate component, which I pointed out in a general piece on housing, where I wrote there are six components of housing value.
In advance of something else I intend to write, it's worth updating this as a new standalone piece, acknowledging the exchange value of a house, and listing eight values because there are three different elements to a house's exchange value.
Urban Fortunes: Towards a Political Economy of Place, distinguish between "use value" and "exchange value" when considering the value of place.
-- original journal article, "City as a Growth Machine: Toward a Political Economy of Place," American Journal of Sociology, 1976. Abstract:
A city and, more generally, any locality, is conceived as the areal expression of the interests of some land-based elite. Such an elite is seen to profit through the increasing intensification of the land use of the area in which its members hold a common interest. An elite competes with other land-based elites in an effort to have growth-inducing resources invested within its own area as opposed to that of another. Governmental authority, at the local and nonlocal levels, is utilized to assist in achieving this growth at the expense of competing localities. Conditions of community life are largely a consequence of the social, economic, and political forces embodied in this growth machine.As discussed in chapter four (starting at page 99, link to the first four chapters from the first edition), use values are generated by living in a place and are consumed socially and personally, and comprise the various components of what I call "place value" below.
Exchange value has to do with the ability to monetize the value of place and is captured in land and building values, rents, and profits and is expressed through property ownership and land use intensification and reproduction more generally.
Generally, exchange values associated with intensification are reaped by real estate and financial interests distant from specific neighborhoods and places.
As residents, people ought to focus more on "place value," and how that should shape their choices about where and how to live.
But long term, for "cashing out" and household wealth portfolio management, the reality is that a house tends to be the most significant financial asset that people have, people do need to be concerned about place values as a package in terms of how they support property values and housing price appreciation.
I've written a lot about how a marginal increase in demand for urban living (recounted in Leinberger's Options of Urbanism), in the face of a relatively static housing supply, has led to significant price appreciation and reorganization and reproduction of various residential housing markets at the metropolitan, city/county, and neighborhood scales.
-- "Exogenous market forces impact DC's housing market," October 2012
-- "Applying the super-gentrification thesis to San Francisco, Santa Monica, and other cities experiencing hyper-demand," January 2014
This is complicated by the fact that in developed places, like center cities, today's markets for land reshape what kind of housing that can be built.
Generally, land values are too high to make realistic the construction of new single family housing, either detached or attached, except in odd situations and locations, usually on the outskirts of a city or in odd bits of institutionally-owned property.
In developed places, most new construction is infill, and usually multiunit, in single buildings, and results in bigger buildings replacing smaller buildings.
One variant is house intensification--teardowns and McMansions--and then, intensification of larger lots in the core. (Also see "A teardown a day: Bulldozing the way for bigger houses," Seattle Times and a blog entry "McMansions 101: What makes a McMansion bad.") The Seattle Times piece points out that the new housing built tends to be 3x higher in price than the housing it replaced.
This more careful consideration of the components of housing value gets at the issue of figuring out how to calculate the long term value of a house and the potential for significant price appreciation, and being able to differentiate what shapes the difference in prices of houses that while located in different places, are seemingly very similar.
The difference comes down to the package of amenities and value of place
Or as commenter charlie once wrote, "the difference between value and price."
1. House use value: comprised of the characteristics of the house (and property) matched with the stylistic preferences of buyers. There are three elements, (a.) "house characteristics" (e.g., old, new, stainless steel appliances, "en-suite bathroom," modern or historic, landscaping, etc.), (b.) size (big vs. average vs. small for both the house and the lot), and (c.) site characteristics (e.g. the lot is on a busy street, the house next door is a wreck, everything is beautiful, the neighbors are amazing, etc.).
One negative about bigger houses is that they cost more to buy, maintain, and pay off ("Why houses in America are getting smaller," CNBC.com; "As U.S. Homes Grow, Lawns Are Shrinking," The Atlantic). Preferences about characteristics and size vary significantly between buyers.
In terms of site characteristics, this can also include negatives--maybe the neighbors aren't so amazing, nearby properties are poorly maintained, the house is located on a busy street, etc.
2. House exchange value (NEW): the price at which you can sell a house, which typically includes appreciation for a wide variety of reasons, such as increased demand and particular improvements and investments (e.g., new kitchen, addition, etc.).
One of the difficulties in some of the discussion about "gentrification," is that some people aren't displaced, but monetizing the value of their property (see the past blog entry from 2005, "More about Contested Space--Gentrification").
3. McMansionization exchange value (NEW): the ability to build a bigger house on the foundations/site. This is function of zoning allowing a bigger house compared to the size of the house when it was originally constructed.
4. Land assembly value (NEW): the ability to buy a single house/lot, and by rebuilding, create additional and separate housing units on the same property through the creation of attached houses, small apartment or condominium buildings, etc. This is a function of underlying zoning allowing for larger properties or more properties than were typically built when the property was first developed.
This also includes the practice of buying contiguous properties, reorganizing them into a larger legal lot, and constructing larger projects with more housing units than could be constructed compared to redevelopment on a lot by lot basis.
5. Neighborhood place value: neighborhood characteristics including public safety, schools, civic assets, access to a neighborhood commercial district, the overall charm and quality of the built environment, neighborhood organization and community building, public safety, etc.
This can also include negative elements, such as proximity to arterials, freeways, being under an airport flight path, etc.
6. Neighborhood location value: proximity to key activity centers and other assets, proximity to Downtown, etc.
Walk Score. My sense is that many of the neighborhoods reported as having persistently low property values in stories about Greater Atlanta and Greater Washington have poor Walk Scores, which serves as a proxy measure for neighborhood place and location value and certain elements of spatial organization.
7. Neighborhood mobility value: at two scales: within the neighborhood and within the city and metropolitan area, measuring access to and presence of transportation infrastructure including walking, biking, transit, parking, the road network, car sharing vehicles, etc. At the neighborhood scale this can be measured by the Walk Score, Bike Score, and Transit Score methods.
In a Canadian study, they have a measure called "location efficiency," which you could argue combines items 5 and 6 and 7 into one measure. See the 2015 blog entry, "Canadians are different than "Americans" when it comes to weighing choices about where to live."
I think there are subtle differences in the components of each item, hence my separate measures.
8. Community place value: the overall characteristics of a city/town/suburb including quality of governance, overall quality of schools, public safety, town centers, cultural and civic assets, community involvement, etc. This is a measure of the same types of amenities in item 4, but at the community scale.
Notes. The housing market is comprised of a wide variety of segments that have a wide variety of preferences when it comes to assessing places on these characteristics. That's what leads to what is often called the "sorting effect" where people choose the place that best meets the greatest number of their preferences.
People who want to live in walkable neighborhoods move to walkable places. People who prefer automobility choose places that are highly accommodating to motor vehicles.
The problems that arise come when people move to places that can't realistically accommodate certain of their preferences, especially on mobility. E.g., it's difficult to live in the core and expect easy street parking, or large lots and/or big houses at affordable prices.
Unfortunately, neither zoning nor resident activism are supportive of nuance in terms of mixing housing types and tenures.
Finally, as it relates to the exchange values of McMansionization and Land assembly, most houses and/or neighborhoods don't possess this kind of value because it isn't supported by zoning and/or demand. Most often, this can change with the addition of transit service, rezoning, etc.
Labels: housing market, housing policy, racism and racial issues, sustainable land use and resource planning, transportation planning, urban design/placemaking, urban revitalization, urban vs. suburban
You're on a roll.
The growth machine quote is spot on. And it exactly what is wrong with the libertarian view of urban life.
(as I've said, urban life is a knot of externalities and hard to apply a uniform market view of things on it)
So, like that recent GGW article on up zoning r1 into townhouse, misses the point.
A couple of spin offs:
1. What the market wants is uniformity. Despite the talk of diversity, what we are really looking for is living around people who share the same values/prices.
2. The Growth Machine knows this, and builds monocultures -- such as the boom in 1 BR condos in DC for 20-35 year olds.
3. The growth machine also wants to suck up as much growth as possible and not let competitive alternative (smaller scale development) happen.
4. We "rich people" can live with that, going back to voice/exit, in that if you have a job you can exit that market. It ins't people who can't exit that are screwed.
5. This is exactly why cities like SF tried to limit development as much as possible. Yes, it drove prices up but it gave a better options to those who stayed. Now in SF when you park a trillion dollars in venture capital 15 miles away you've got problems.
wrt 1, 2 and 4, it' why you can have tall apartment buildings that are desirable for people with money, while the same types of buildings lived in by the poor because centers for chaos.
It's the difference between Cabrini Green and the Gold Coast of condo buildings on Michigan Avenue.
wrt 5, I'd counter a bit, because it also explains indirectly some of the criticism of Jane Jacobs.
Yes places like SF limited new development. But for a long time the nature of the market was such that people of a great variety of economic circumstances could still be accommodated.
Not now. Writing in the late 1950s and early 1960s JJ wasn't able to forecast the change in the nature of high demand world cities, and how those characteristics she hailed would increasingly be captured by those with high incomes and there wouldn't be enough to go around and provide to lower income segments.
In NYC and SF and West Los Angeles especially, exogenous changes in economic conditions, world cities, the 21st century, etc. increased demand for living in those places beyond the ability to accommodate people making less money, even the middle class.
The tighter the market, the greater the quality of life, the more supergentrification.
the other comment of yours that I didn't acknowledge that shaped my "need" to write about this originally and undergirds this and related posts (besides your point about "externalities" which we can also call use and exchange values) is that theoretically once a house is built and sold, because it is "used" it should depreciate in value categorically, not appreciate.
note wrt your "externality" point, Engwicht says this differently (as does JJ in _Economy of Cities_ and _Cities and the Wealth of Nations_), that cities developed to facilitate exchange -- not just of goods and services but ideas and relationships and knowledge.
The facilitation is caught up in the idea of agglomeration economies, but yes, the libertarians don't seem to fully understand all the elements.
in terms of #1, I changed it to three elements. I neglected to separate out site characteristics particular to the property, such as location on a busy street.
British article about the impact of proximity to Aldi (and Waitrose) on property values. Says a 5K increase wrt Aldi (another study found a 40K increase wrt Waitrose). WRT the latter, like my complaints about such studies in the US, I wonder if they are measuring high value markets which are high value and the retailer locates there, not the other way around.
SO the Aldi effect is more interesting. But I think store location decision making is a bit different in Europe. An "Aldi" there might not be located in a downmarket neighborhood the way it is here.
The Lidls and Aldis I saw in Germany were in middle income neighborhoods and downtown districts, not in downmarket neighborhoods.
From the article:
Doug Crawford, chief executive of My Home Move, said that locations such as South Ruislip, Billingham and Poynton have benefited from the Aldi effect.
He told The Sun : “Our own research has shown that a third of home movers chose their new property based on its proximity to shops and local amenities – and as such we are not surprised that the recent popularity of Aldi, with its cheaper lines and award-winning products, has had a positive effect on the value of local homes.
What's interesting about this is that only 1/3 of home buyers look at amenities issues according to their research.
Architecture and the Housing Market: Nineteenth Century Row Housing in Boston's South End
Margaret Supplee Smith and John C. Moorhouse
Journal of the Society of Architectural Historians
Vol. 52, No. 2 (Jun., 1993), pp. 159-178
lot size, house size, location account for 74% of the price of a row house; architectural style and features for 14% and are most highly valued when they differentiate a row house from its neighbors.
Another version was published in the Journal of Urban Economics, 35:3 May 1994
paper on the impact of airport noise
and freeway noise
"Coronavirus could widen black wealth gap"/inequalities of homeownership
Is Prince George’s still the richest majority-Black county in America?
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