Big House, Little House: Relative Size and Value

Abstract

How do markets value relative house size in a neighborhood? The literature offers differing rationales: atypical houses sell for less, capitalization of property taxes penalizes larger and benefits smaller houses in mixed neighborhoods and conspicuous consumption reinforces the value of relatively larger houses and reduces the value of relatively smaller houses to consumers. Using a simultaneous price-liquidity model that controls for neighborhood supply and demand conditions, this article finds a dominant tax capitalization effect on price and marketing time that appears to override any extant atypicality or conspicuous consumption effects.Which does the market more highly value, the smallest house in a neighborhood of large houses or the largest house in a neighborhood of smaller houses? Real estate agents often give seemingly conflicting recommendations, arguing that the best deal is to buy into a nicer neighborhood by buying in on the low end while also maintaining that buying the largest house in a neighborhood gives more house for the money. And regardless of one's personal view, casual conversation about the answer to this question will quickly illustrate the wide range of opinions that exists.The academic literature also offers differing rationales on this point. One hypothesis attributable to Haurin (1988) is that atypical houses by definition do not fit the neighborhood and so are priced to sell for less. Another, originally developed by Hamilton (1976), is that the capitalization of the property tax for a given public service bundle penalizes larger houses and benefits smaller houses in mixed neighborhoods, thereby leading to differential capitalization effects on each. Yet another is that conspicuous consumption reinforces the value of relatively larger houses and reduces the value of relatively smaller houses to consumers. While these separate hypotheses are not mutually exclusive, they do lead to different answers to the question of relative house size and value.

The fiscal externality of multifamily housing and its impact on the property tax: Evidence from cities and schools, 1980–2010

“…White (1975) and Brueckner (1981) provide extensions that are perhaps the closest in spirit to Hamilton's original work. 2 A recent study by Turnbull, Dombrow, and Sirmans (2006) is a possible exception, although the authors do not directly test for fiscal impacts. 3 Although this paper's distinction between apartments and single-family residences is not intended to be a direct comparison between "small" and "large" homes, the former distinction implies the latter in most instances.…”

Empirical spatial econometric modelling of small scale neighbourhood

“…Earlier studies have confirmed that the geographical location of the observed data are important when modelling house prices and it has been pointed out that the small scale neighbourhood has a substantial effect on the price (Laakso 1997;Karakozova 2005;Turnbull et al 2006;Kiel and Zabel 2007;Leonard and Murdoch 2009). However, a problem is how to capture and formulate location and small scale neighbourhood in an econometric model.…”

Flooding and Liquidity on the Bayou: The Capitalization of Flood Risk into House Value and Ease‐of‐Sale

“…If, on the other hand, the shopping externality effect dominates, then increasing surrounding listings will increase selling price, shorten time on the market or both. Neighborhood market condition variables are typically significant in price and selling time equation systems (Turnbull and Dombrow 2006, Turnbull, Dombrow and Sirmans 2006, Turnbull and Zahirovic‐Herbert 2011, 2012, Zahirovic‐Herbert and Turnbull 2008).…”