Abstract
Private land-use restrictions at the subdivision level, commonly called covenant or deed restrictions, have the potential to reduce housing consumption and investment risk and existing empirical evidence has shown a positive marginal housing price for covenant restrictions. However, some commentators have charged that covenant restrictions are full of boilerplate and mostly unenforced, thus any positive marginal price measurement captures other unobserved aspects of the subdivision. Indeed newly published estimates report zero or negative marginal price for deed-restricted subdivisions (DRS). This paper reviews these claims using a hedonic model of housing and a unique dataset that includes covenant restrictions, by-laws, and club goods. Results show a positive marginal price of deed restrictions even when controlling for several subdivision characteristics; however, the marginal price of restrictions falls to zero if a covenant is not updated after 25 years.
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Notes
Deed-restricted subdivisions in Saint Louis County, the study area, use one of four governance structures; incorporated homeowner association, unincorporated homeowner association, board of trustees (who are voted on by the homeowners), or a simple contract where residents independently use civil action (or the threat of civil action) to enforce rules.
Many HOAs do include property which is owned by the association and thus the cost of maintenance must be shared but since the units are detached no capital is physically being shared.
Subdivisions are defined as two or more lots subdivided by the same owner for residential use. The smallest DRS included only four lots but most had more than 100 lots. Non-DRS house sales include housing not in a subdivision.
Several deed restrictions in Saint Louis County exist between a single property and the local fire district or sewer district. These restrictions are not included in this study.
Future research could investigate the impact of the different institutional designs on covenant enforcement and amendment.
Hughes and Turnbull (1996, p. 165).
Guntermann and Moon (2002) came to a similar conclusion using data from a mobile home park.
Cannaday (1994) finds similar evidence in the Chicago condominium market. Dog restrictions produced a positive marginal price estimate but cat restrictions were negative. This suggests that some residents, if not developers, are over providing restrictions.
No published research has argued or demonstrated that covenants are largely a by-product of the development process but the argument has been discussed in several real estate focused conference sessions.
A second-stage model can estimate the demand and thus consumer surplus of covenant restrictions but because of the data requirements call for household-level income and preference information this study is restricted to a first-stage hedonic model.
Base on a small sample of current sales, MLS data proved to be quite inaccurate with respect to yearly DRS assessment. Future work in the area may require a survey of residents to determine DRS assessments.
I thank an anonymous referee for pointing out the potential bias.
The double-log form was generated by transforming all variables with a minimum value greater than zero by the natural log. All other variables were left untransformed.
Alternative weights of 5, 10, and 20 nearest neighbors were also tested using a Lagrangian multiplier test (Anselin 1988) but the 15 weight produced the most significant results. The use of other weights did not change the results.
All DRSs in Wildwood, save one, used a one-lot-one-vote system. The only DRS that deviated from the common voting system divided its voting shares by lot size but the DRS had no sales during the time period selected.
This follows Rogers (2006).
Principal component analysis was also conducted using all architectural and use restrictions but the first component was highly correlated with the above index thus it was not added to this study.
The third principal component is not reported.
The Saint Louis County Assessor’s office does not include a count of lots in a subdivision or a reliable code for subdivisions. The subdivision lot count was created by counting lots in HOA subdivisions only because HOAs provide clear boundaries of a planned development. Non-HOA subdivisions include more vagaries.
There are no gated communities in Wildwood although there are about two dozen in the surrounding areas.
Relatively high maintenance was judged by the author as requiring weeding or watering about every two weeks in the summer.
The median house size was over 2,500 square feet of living space. Of course more bedrooms must mean other rooms are smaller.
In other words, 10 acres of common ground is a lot for a DRS with 10 lots but little for one with 100 lots.
This statement is the personal opinion of the author after a visual inspection (and test drive).
The age of subdivision was also interacted and estimated to match Hughes/Turnbull’s approach but it produced a coefficient with less statistical and economic significance.
An elaborate entrance monument dummy variable was included in an earlier version in an attempt to measure conspicuous consumption. Elaborate monuments were judged by the author as being large all or mostly brick structures with lighting and often additional features including waterfalls. However, the dummy was not included in this version because of statistical insignificance.
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Acknowledgements
I would like to thank Brian Speicher for assistance in collecting some of the subdivision data and the writing of a preliminary manuscript “Assessing Institutional Characteristics of Residential Community Associations: A Hedonic Approach.” All errors are the authors.
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Rogers, W.H. The Housing Price Impact of Covenant Restrictions and Other Subdivision Characteristics. J Real Estate Finan Econ 40, 203–220 (2010). https://doi.org/10.1007/s11146-008-9134-2
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DOI: https://doi.org/10.1007/s11146-008-9134-2