Good Home Improvers Make Good Neighbors

W08-2: Research on the determinants of home improvement activity generally ignores the neighborhood context in which homeowners live. However the condition and trends of the surrounding properties influence a homeowner’s attitude toward his or her own house. This “neighborhood effect” is a situation where neighborhood conditions (including overall level of home improvement spending) impose costs and benefits or otherwise influence the behavior or actions of a homeowner. Similarly, the home improvement activities of an individual homeowner may impose costs and benefits on nearby property owners and thereby influence the general level of maintenance in the neighborhood. To the extent that the level of home improvement influences the desirability of a particular home or of homes on average in the neighborhood, these externalities can be measured by examining changes in home valuations. Using the Metropolitan Surveys of the American Housing Survey, from 1995-2004, this paper analyzes the differences in real appreciation rates between neighborhoods with different levels of median home improvement spending, even for households with comparable levels of individual expenditures. This paper finds a modest but statistically significant neighborhood effect, which was strongest among those households which spend the least individually. For a given level of individual home improvement spending, the inflation-adjusted annual house price appreciation rate was 15% higher in high spending neighborhoods compared to low spending ones…