Housing Market and Housing Market and AbandonmentAbandonment

Honors SeminarHonors Seminar

Prof. BarrProf. Barr

Housing CharacteristicsHousing Characteristics

Durable: Can last hundreds of years. Market is Durable: Can last hundreds of years. Market is mostly for used houses.mostly for used houses.

Immobile: It comes with a neighborhood.Immobile: It comes with a neighborhood. Quality variety: Each dwelling is like a snowflake, Quality variety: Each dwelling is like a snowflake,

no two are alike:no two are alike:– Age, size, layout, aesthetics, appliances, etc.Age, size, layout, aesthetics, appliances, etc.

Housing depreciates: requires maintenance.Housing depreciates: requires maintenance. Rent vs. ownership choice.Rent vs. ownership choice. Location, location, location.Location, location, location.

Housing Value: A Hedonic ApproachHousing Value: A Hedonic Approach

A convenient way to specify the price of a A convenient way to specify the price of a house is via the hedonic price approach:house is via the hedonic price approach:– price=f(rooms, size, age, neighborhood quality, price=f(rooms, size, age, neighborhood quality,

taxes, plot size) taxes, plot size) – i.e,. prices are a function of a series of debits i.e,. prices are a function of a series of debits

and credits.and credits.– p=f(+,+,-,+,-,+)p=f(+,+,-,+,-,+)– Therefore prices reflect the value of a bundle of Therefore prices reflect the value of a bundle of

housing services.housing services.

A Housing ModelA Housing Model

P

Quantity of housing services

To begin: Let’s assume housing market is for housing services: houses provide utility for the shelter, comfort, domestic productivity, status, etc.

Demand: Income, tastes for housing services (style, free standing, etc.)

Supply: Costs of housing services. Price of inputs, etc.

QsQd

P*

Q*

Equilibrium: Price which equates supply and demand.

Renting vs. OwningRenting vs. Owning

Renting versus is owning in this country is Renting versus is owning in this country is generally a function of income (Newark is #1 generally a function of income (Newark is #1 in terms of % renters).in terms of % renters).

To buy you need to accumulate wealth to To buy you need to accumulate wealth to qualify for mortgage and need to have qualify for mortgage and need to have mortgage payments low relative of income.mortgage payments low relative of income.

Easier to rent small space then buy a large Easier to rent small space then buy a large space.space.

20

40

60

80

5 10 15 20 25 30

Scatter Plot: % Owner Occupied vs Poverty Rate for 68 Large Cities in U.S., 2003

% Poverty

% O

wner O

cc.

http://www.census.gov/acs/www/Products/Ranking/index.htm

0

10

20

30

40

50

0 10 20 30 40 50

Median HH Income

% O

wn O

cc.

ScatterPlot: Newark Census Tracts: % Owner Occupied vs HH Income, 2000

Regression: Dep Var: %Own-Occ.Regression: Dep Var: %Own-Occ.Cities across U.S., 2003Cities across U.S., 2003

R Square 0.62

Adjusted R Square 0.60

Observations 68

  Coefficients t Stat

Intercept 84.3 10.1

%Below Poverty Line -1.1 -5.8

%Foreign Born Residents -0.30 -3.7

% Residents 25+ w. Bachelor’s -0.38 -3.9

% Residents who are veterans. 0.33 1.1

Renting vs. OwningRenting vs. Owning

Renting vs. owning, however, generates different Renting vs. owning, however, generates different incentives for neighborhood and housing quality.incentives for neighborhood and housing quality.

Owners have a vested interest in both:Owners have a vested interest in both:– Homeownership is a form of investment.Homeownership is a form of investment.– Unlike stocks and bonds, you cannot diversify away Unlike stocks and bonds, you cannot diversify away

risks.risks.– Maintain your house to preserve your investment.Maintain your house to preserve your investment.– Maintain civic involvement to preserve value of house, Maintain civic involvement to preserve value of house,

etc.etc.

Dep Var: % Vacancy in each Census Tract

R-squared 0.58

# Obs 90

Coeff. t-stat

% Renters -0.36 -6.19

% Poverty 0.20 3.22

Med HH Inc (000) -0.32 -4.15

Intercept 37.10 6.41

Regression: Vacancy Rates in Newark by Census Tract, 2000

Rent vs. OwnershipRent vs. Ownership

Renters:Renters:– Less likely to maintain housing quality—they Less likely to maintain housing quality—they

have much less to gain.have much less to gain.– No vested interest in preserving property No vested interest in preserving property

values.values.– Community involvement, etc. is less [this will be Community involvement, etc. is less [this will be

taken to extreme when we look at taken to extreme when we look at abandonment, neighborhood quality, and abandonment, neighborhood quality, and vandalism, arson and rioting….]vandalism, arson and rioting….]

Renters vs. OwnersRenters vs. Owners

Quality maintenance decisions also confer Quality maintenance decisions also confer an externality effect upon neighbors:an externality effect upon neighbors:– If your neighbor doesn’t maintain her house, it If your neighbor doesn’t maintain her house, it

affects the value of your house (who wants to affects the value of your house (who wants to live next to a messy neighbor?)live next to a messy neighbor?)

– Civic involvement of your neighbor also affects Civic involvement of your neighbor also affects your house value.your house value.

Fostering homeownership improves the Fostering homeownership improves the economies of communities, all else equal.economies of communities, all else equal.

Simple Model: Landlord Profits and Simple Model: Landlord Profits and AbandonmentAbandonment

Prof=Revs-Costs: Prof=Revs-Costs: PQPQ -.5Q-.5Q22- cTQ - - cTQ - ττ(PQ)(PQ) Costs of maintenance go up with age (T).Costs of maintenance go up with age (T). ττ is tax rate on value of property. is tax rate on value of property. How much services to provide as function of How much services to provide as function of

profits?profits?

Model cont.Model cont.

Q*=P(1-Q*=P(1-ττ)-cT)-cT (via profit max.) (via profit max.) So what happens when: P goes down, and So what happens when: P goes down, and cc

and and τ τ goes up? goes up? At some point when Prof<0At some point when Prof<0 better off better off

walking away from the property.walking away from the property. Keep in mind that value of property= Keep in mind that value of property=

Prof/interest rateProf/interest rate.. Market disappears when Market disappears when ProfProf<0.<0.

Abandonment in NewarkAbandonment in Newark(Sternlieb & Burchell)(Sternlieb & Burchell)

Irony of abandonment: amidst the great need for Irony of abandonment: amidst the great need for housing are empty houses.housing are empty houses.

Many major cities affected (e.g. NY, Phili, St. Many major cities affected (e.g. NY, Phili, St. Louis)Louis)

Definition (Not easy to give)Definition (Not easy to give)– Stop maintaining property.Stop maintaining property.– Transfer ownership to CityTransfer ownership to City– Significant tax arrears.Significant tax arrears.– Empty and/or vandalized, boarded upEmpty and/or vandalized, boarded up– Removed from housing stock and for which no Removed from housing stock and for which no

replacement use is found.replacement use is found.

Sternlieb’s StudySternlieb’s Study

A sample 567 housing structures visited in A sample 567 housing structures visited in Newark in 1964 were revisited in 1972.Newark in 1964 were revisited in 1972.

Questions asked in study:Questions asked in study:– What was the extent and nature of What was the extent and nature of

abandonment?abandonment?– Who were the abandoners?Who were the abandoners?– Why did they abandon their property?Why did they abandon their property?

Sternlieb cont.Sternlieb cont.

Of 567 re-sampled buildings, 15% were Of 567 re-sampled buildings, 15% were abandoned by 1971.abandoned by 1971.

Keep in mind commercial buildings were Keep in mind commercial buildings were being abandoned too, 1967-1971, 5.2% being abandoned too, 1967-1971, 5.2% abandonment rate per year.abandonment rate per year.

On average, 2% of real estate stock in early On average, 2% of real estate stock in early 1970s was being abandoned per year.1970s was being abandoned per year.

Demand SideDemand Side

Abandonment occurs in neighborhood with Abandonment occurs in neighborhood with declining demand for housing services (i.e. declining demand for housing services (i.e. low income, high unemployment).low income, high unemployment).

But keep in mind, not all houses were But keep in mind, not all houses were abandoned: correlation between income and abandoned: correlation between income and abandonment, but abandonment occurs abandonment, but abandonment occurs also because of supply side issues.also because of supply side issues.

Supply Side of AbandonmentSupply Side of Abandonment

A Key factor in abandonment is tax arrears.A Key factor in abandonment is tax arrears. Presence of non-white residents in white-owned Presence of non-white residents in white-owned

structures (primarily older, distant landlords with structures (primarily older, distant landlords with no vested interest in city or housing stock.)no vested interest in city or housing stock.)

Interestingly, the abandoned structures were in no Interestingly, the abandoned structures were in no worse shape in 1964 than the ones still in use in worse shape in 1964 than the ones still in use in 1971. 1971.

The abandoners wanted to sell the parcel but The abandoners wanted to sell the parcel but could not.could not.

Property Taxes and AbandonmentProperty Taxes and Abandonment

Property taxes are leveled on value of property.Property taxes are leveled on value of property. In theory, when you improve your property, you In theory, when you improve your property, you

increase value and therefore increase your tax bill.increase value and therefore increase your tax bill. Tax ratesTax rates are going up, regardless, because of are going up, regardless, because of

eroding tax base in industrial cities.eroding tax base in industrial cities. Therefore:Therefore:

– When rental income is going down, you will not invest in When rental income is going down, you will not invest in improvements because it will increase your expenses improvements because it will increase your expenses (outlay of money) and your tax bill.(outlay of money) and your tax bill.

– Not paying taxes is an easy way therefore to eliminate Not paying taxes is an easy way therefore to eliminate expenses on your investment.expenses on your investment.

Tax DelinquencyTax Delinquency

66% of abandoned properties were in tax arrears.66% of abandoned properties were in tax arrears. ““Since the city steps in to purchase abandoned Since the city steps in to purchase abandoned

structures, it unwittingly encourages owners to structures, it unwittingly encourages owners to destroy through nonimprovementdestroy through nonimprovement. In other words, . In other words, tax delinquency becomes an incentive for tax delinquency becomes an incentive for abandonment.” (xxvii)abandonment.” (xxvii)

A well-maintained property will A well-maintained property will fetch no morefetch no more in in the market placethe market place

Who are the landlords who abandon?Who are the landlords who abandon?

In short, the group most likely to abandon In short, the group most likely to abandon properties are “widows and children” of landlords properties are “widows and children” of landlords who lived in neighborhoods and left and are who lived in neighborhoods and left and are “milking” the property for the rental income. “milking” the property for the rental income.

Real Estate Brokers and Lawyers (those who Real Estate Brokers and Lawyers (those who know about possible urban renewal programs, know about possible urban renewal programs, etc.)etc.)

Least likely to abandon are those who live on the Least likely to abandon are those who live on the property and can maintain the property property and can maintain the property themselves. themselves.

Not the “slum lords”: can make profits in this Not the “slum lords”: can make profits in this market (econ. of scale and know-how).market (econ. of scale and know-how).

Why Abandonment?Why Abandonment?

““The key fact of life here is not owners The key fact of life here is not owners giving up the business, that is a constant in giving up the business, that is a constant in any form of enterprise, the unique element any form of enterprise, the unique element is rather the fact that there are a few is rather the fact that there are a few alternative buyers—regardless of price.”alternative buyers—regardless of price.”