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Wednesday, May 7, 2008

Premium for New Urbanism

One of the most popular criticisms of Daybreak that I have heard people use is that the community is overpriced. In my opinion the whole market is overpriced at this point, but holding this factor aside is Daybreak more expensive than comparable homes? Maybe an appraiser or real estate agent might claim that it is about even if not slightly overpriced. However, the general opinion that I have collected from friends and coworkers that live in nearby neighborhoods is that Daybreak is overpriced. I might argue that the amenities justify the price, but my friends eagerly point out that I pay a home owner's association fee for the amenities each month. With these facts in consideration, should a house in Daybreak cost more than the surrounding area? The answer is yes. Why? Because the market has proven that consumers are willing to pay a premium to live in communities that exhibit new urbanism traits.
New urban communities are relatively new. The first community to be dubbed new urban was constructed in Florida in the early 80s. Back then no one really knew to what extent the design features of new urban communities would add value. They could only surmise that people liked the features and thus demand would dictate a premium be paid.

Recent studies now go into detail about the value adding amenities and the amount of value they contribute. One of the first of these was a study called Valuing New Urbanism: The Case of Kentlands. This analysis used a hedonic pricing model in which size, construction quality and other variables were held constant. The conclusion? When compared to homes in conventional suburbs outside of the community, homes in Kentlands exhibited a $24,000 to $30,000 price premium. The study was conducted in 1998 and the gap has widened since then.

Not only will consumers pay a premium to live in new urban communities this premium has grown larger through the years. Another new urban community has exhibited a 14.4 percent higher appreciation rate than comparable homes with all significant factors held constant. This widening gap was attributed to features in the community reaching maturity.

Additional studies conducted by Market Perspectives and the Urban Land Institute compared New Urbanist communities with standard subdivisions. Their study showed a minimum 15 percent premium for houses in New Urbanist communities. These studies were conducted by comparing regionally diverse new urbanist communities with homes in nearby conventional neighborhoods. The authors accounted for site traits, housing characteristics, unit quality, neighborhood, and other market factors. They even considered HOA fees. Even with those factors not being accounted for, new urbanist communities still command a solid 7% price premium.

I'm not sure as to the exact percentage, but from what I can estimate from real estate listings I can see a small, but visible price premium for homes in Daybreak. The turmoil in the market prevents any serious investigation at this point. I have to admit that I generalize the fairly rigorous studies conducted on values because the variables appear to be the same. However, if I am even close in my assumptions, in the years to come Daybreak will appreciate significantly faster than surrounding real estate.

1 comment:

Anonymous said...

I agree with your argument and appreciate the factual data to back it up. One concern is that Daybreak's location in the valley is less than ideal currently. Isn't the number one rule in real estate, something like location x3. It is on the "west" side and my perception is that the homes on the west side of the valley will be less likely to appreciate or hold value, I think this is a general myth or misconception or truth that many people who grew up in the valley hold on to. Also, it is at the base of a huge pile of mine tailings! There will never be the convience and proximity to the east bench canyons and ski resorts that generate the reputation of Salt Lake as a great outdoors type of city. Granted, you'll have to drive 10-15 minutes but it make a huge difference if you want to, say ride your bike up Millcreek Canyon or Emigration, etc. How about the dump's proximity and the smell that passes over, maybe that will be moved, hopefully. Downtown is also relatively far away, pretty much an hour of driving to catch a symphony, broadway, dinner, etc. So, location is relative and I agree that homes should have more value by being in Daybreak but would argue that compared to the rest of the valley, the location may dampen the appreciation seen in other urbanistic? communities. Any replies would be appreciated. Thanks again for the great blog.