Article by Catherine Jun Detroit News March 5, 2009 Presented by Ed Matecki Empty Homes Slowly Decaying Neglected foreclosures dragging down value of neighborhoods Disposition of Vacant Homes Not surprisingly, the number of vacant properties in metro Detroit has grown significantly since 2000: Southeastern Michigan from 5.5% up to 7.5% Wayne County from 7% to 10.3% Oakland County from 4.2% to 6.2% Source: Southeast Michigan Council of Governments Not just an inner city phenomenon. Vacant properties are common in the suburbs as well. Disposition of Vacant Homes Many vacancies still retain their curb appeal. The exteriors of the house remain in good condition However, dont judge a book by its cover! The durable exteriors are often times masking serious interior problems that accumulate after extended periods of neglect Crumbling plaster, flooded basements, burst pipes, bubbling paint, etc. Disposition of Vacant Homes The harsh winter has exacerbated many of these problems (leaky roofs, ruptured septic tanks) According to realtors, interior problems tend to be more costly to repair, requiring heftier renovations The more costly the repairs, the more discounted the selling price must be Some houses selling for only 10% of their previous appraised value Analysis Without saying so explicitly, the realtors are acknowledging a hedonic pricing model. A basic formulation is: Are vectors of exterior and interior features respectively Analysis The hedonic price,, of each feature, say is given by: One conclusion of the article is that the hedonic prices of the interior features tend to be greater than the exterior features, or: Analysis The article goes on the mention the fact that many occupied dwellings are losing value due to the presence of nearby vacancies. Things like this drive people out of neighborhoods This is a classic externality, where the deterioration of one property spills over onto adjacent properties The decrease in home values is eroding consumer wealth, lowering utility, and forcing migration (unstable equilibrium?) Analysis So now, the hedonic pricing model is being expanded to include neighborhood characteristics: Where W is a vector or neighborhood characteristics. One of the might be the number of vacant homes within a certain distance. Should action be taken? The presence of an externality might justify some local government action The obvious solution would be for the local authorities to purchase some of the worst properties and have them demolished or renovated and sold. Would benefits exceed costs? Places like Waterford are doing just that, with plans to demolish 15 houses in 2009 using $2m in federal money. However, they also plan to have Habitat for Humanity rebuild new housing, which doesnt make much sense if youre concerned about stabilizing home prices. Any Questions?