The Impact of Neighborhood Organizations on Housing Price

Stuart Price

Econ 345

April 7, 2013

The Impact of Neighborhood Organizations on Housing Price

Introduction

In Durham, NC, Neighborhood Organizations can formally register themselves with the Durham City- County Planning Department through an application process. Although this action provides no formal benefits to the neighborhoods, it gives them an intrinsic sense of stature for engaging public officials and addressing local issues affecting their community. In this sense, according to Cunningham and Kotler (1983,8), “neighborhood organizations are able to wage responsible wars of pressure and advocacy to ensure that a just share of available resources goes to the neighborhood.” Moreover, neighborhood organizations enable an improved sense of institutional infrastructure and stability, which Briggs and Mueller (1997) support in their finding that neighborhood organizations can cause positive effects on an area’s social environment.

Given these reported benefits of neighborhood organizations, this paper explores the impact that neighborhood organizations have on housing prices. In their study of households’ valuation of neighborhood amenities in the Baltimore metropolitan area, Dubin and Goodman (1982), found that the presence of neighborhood organizations (one of the thirty-three variables in their hedonic pricing model) positively impacted housing prices. Using a simplified hedonic pricing model, this paper attempts to determine whether the same positive impact holds for implicit valuations of homes in Northgate Park and Colony Park neighborhoods when compared to similar housing. Comparable housing was chosen from adjacent areas that were not incorporated under an official Durham Neighborhood Organization.

Hypothesis

Based on the study by Dubin and Goodman and the positive externalities associated with neighborhood organizations as shown by Cunningham and Kotler and Briggs and Mueller, it is expected that the presence of a neighborhood organization should positively impact housing prices. Thus when comparing a property that is a part of a neighborhood organization to a similar property which is unaffiliated, a dummy variable constructed for the neighborhood organization variable should be significant and positively correlated to housing price (assuming 1 is assigned to neighborhood organization and 0 is assigned to no neighborhood organization).

Methodology and Model Description

This paper analyzes the effect of both the Northgate Park Neighborhood Association and the Colony Park Association on their respective community’s housing prices. Hedonic pricing models provide an implicit evaluation of households “through the analysis of a house as a bundle of structural and neighborhood characteristics....This hedonic price is interpreted as the added value in the market of a unit of the characteristic (Dubin & Goodman, 167).”

Within this paper, there are two different hedonic models that are used to predict housing value. For theColony Park Association, the following regression model was used:

Ln (Zillow Price Estimate) = α0 + β1#Bedrooms + β2 #Bathrooms + β3 Square Footage + β4 Lot Size+ β5 Year Built + β6 Left Neighbor Price Estimate + β7 Right Neighbor Price Estimate + β8 Neighbor + ε

And for Northgate Park Neighborhood Association the following regression was used:

Both separate regression models relied on sixty observations. These observations were randomly selected and included thirty properties within the Northgate Park and Colony Park neighborhoods as well as thirty observations of comparable, adjacent properties. Maps of the neighborhoods and the areas of corresponding comparable housing (outlined in red) are provided below:

Northgate Park

Colony Park

All data present in these two regression analyses was gathered from Zillow.com. The dependent variable in both regressions reflects Zillow.com’s most recent Zestimate, which is computed using a proprietary formula and represents the estimated market valueof different properties. The variable Neighbor is a dummy variable constructed to test whether the Neighborhood Organization designation impacts housing prices. Lastly, the regression model for the Northgate Park Neighborhood Association includes the three extra dummy variables, Elementary School, Middle School, and High School, which are used to determine the impact the impact that public school assignment has on housing price. In the case of the Colony Park analysis, these variables are unnecessary as all sixty properties areassigned to the same elementary, middle, and high schools.

The regression models themselves are nonlinear. This paper utilizes the semilog functional form because, “it has become perhaps the most widely used functional form in hedonic studies (Coulson, 24).” In such a model, each variable’s coefficient is known as a semi-elasticity and “roughly speaking, the coefficients give the percentage increase in price due to a unit increase in X (Coulson, 25).”

Data Analysis

Multivariate regression analysis on the property observations produced the following Ordinary Least Squares (OLS) estimates:

Colony Park Northgate Park

For the Colony Park Association and surrounding comparable housing the hedonic price function estimate is as follows:

Ln (Zillow Price Estimate) = -22.78 + .065*#Bedrooms + -.114*#Bathrooms+ .00027*Square Footage + 3.6503e-6*Lot Size+.0177*Year Built + -1.319e-6*Left Neighbor +-3.878e-7 Right Neighbor+0.0482 Neighborhood

And for Northgate Park Neighborhood Association the hedonic price function estimate is as follows:

Ln (Zillow Price Estimate) = 1.869 + .0039*#Bedrooms + 0.09*#Bathrooms+ .00029*Square Footage + 1.561e-6*Lot Size+ .0046*Year Built + -1.125e-6*Left Neighbor + 1.99e-7 Right Neighbor+0.127 Neighborhood +0.05Elementary School + 0.0016Middle School + -0.0197High School

Colony Park Northgate Park

The Colony Park hedonic model has a low R2 coefficient of determination. Only 45.80 percent of the total variation in Ln (Zillow Price Estimates) can be explained by the regression equation. Assuming a significance level of .05, only the covariates Square Footage and Year Built are significant. The estimate for the Neighborhood covariate indicates that inclusion in the Colony Park Association leads to a 4.82 percent increase in the value of a property in the area. The t Ratio for the coefficient remains low, however, at value of .57, indicating a high level of variability in using membership in the Colony Park Association as an indication of increase property value.

On the other hand, the Northgate Park hedonic model has a higher R2 coefficient of determination. 79.60 percent of the total variation in Ln (Zillow Price Estimates) can be explained by the regression equation. Assuming a significance level of .05, the coefficients Square Footage,Year Built, and Neighborhood are significant. The estimate for the Neighborhood coefficient indicates that property located in the in the Northgate Park Neighborhood Association as leads to a 12.7 percent increase in the value of a property in the area. Moreover, our model predicts a t Ratio of 2.46 associated with the Neighborhood coefficient. This indicates that membership in the Northgate Park Neighborhood Association is a significant indicator of increased property value.

Such a conclusion in the case Northgate Park, however, comes with serious reservations. This paper’s hedonic models for both Neighborhood Organizations are not comprehensive as indicated by low adjusted R2 values. Given the scope of this paper, it relied on Zillow.com as its primary source for information. There are several problems with this approach. First, Zillow’sZestimate is a mere proprietary tool to estimate the true value of a house. The amount of information known about a specific home affects the accuracy of the Zestimate. Thus missing or incorrect information can skew the pricing data used in this paper. Moreover, because of this incomplete information problem, this paper’s hedonic models could be missing attributes that affect its price. For example, potential variables s such as environmental amenities, age of appliances, and street-level crime data could influence the value of properties. For the purpose of this paper, since the comparable housing was adjacent to each Neighborhood Organizations, it was assumed crime rates were constant for the incorporated and unincorporated properties. This assumption, however, was not necessarily correct but simply necessary because street-level crime data was not accessible.

In addition to missing covariates, this regression analysis also suffered from the phenomenon of multicollinearity. One assumption underlying the OLS model states that random components are not related across observation. A principal component analysis (shown for the Northgate Park regression), however, indicates a correlation between different predictor variables.

This evidence helps to explain some seemingly inaccurate estimates of different coefficients. For example, an estimation that membership in the Northgate Park Neighborhood Association would lead to a 12.7 percent increase in housing price seems very high. Rather, this coefficient estimate could be a linear combination of several different independent variables.

Conclusions

Despite limitations to this paper’s hedonic pricing model, there is evidence that membership in a Neighborhood Organization has some positive effect on housing prices. In regression model for both the Colony Park and Northgate Park neighborhoods, membership positively affected housing prices. This positive affect was significant in the case of Northgate Park. In order to determine a more accurate estimate of these effects, however, a more comprehensive hedonic pricing model is necessary in order deal with challenges such as omission error and multicollinearity.