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The Transitory and Legacy Effects of the Rental Externality on House Price and Liquidity

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Abstract

It is widely believed that tenant-occupied houses do not show as well as owner-occupied or even vacant units and so are harder to sell. These short term or transitory marketing effects should disappear in subsequent sales by owner-occupiers. Overuse by tenants and poor maintenance by landlords, however may lead to longer term or legacy effects on value and liquidity. We use a 20 year data series on house transactions to estimate these separate effects in a simultaneous model of price and liquidity. The results reveal strong transitory renter effects on both value and liquidity consistent with lower buyer willingness-to-pay. We do not find persistent legacy effects from prior use as rental property. Instead, there appears to be unmeasured quality or a characteristic common to houses suitable for rent that leads to permanently lower market values regardless of previous use in that capacity.

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Notes

  1. Lippman and McCall (1976) provide a seminal influence on search models of housing markets. See Arnott (1989), Haurin (1988), Krainer (2001), Williams (1995), and Wheaton (1990) for a variety of approaches grounded in search or matching environments.

  2. The arrival rate and buyer offer distribution are assumed stationary during the exposure of a given house to the market, which implies that the seller’s optimal reservation price strategy s is also stationary. Over the longer term, of course, both the arrival rate and buyer offer distribution will change as housing demand changes over the market cycle, leading other sellers to adopt different reservation prices in response to the prevailing conditions during the period in which they have their properties on the market.

  3. The new curve will not in general have the same slope or curvature as the original.

  4. The AHS provides information about owners as well as house characteristics. House prices are self-reported by survey participants. It does not provide observed transactions prices or selling time and the confidentiality restrictions mask the intra-urban area location characteristics of the properties included in the survey.

  5. Changes in holding cost per period, h, do not change the utility function; instead, changes in h change the indifference curve map portrayed in E[P], E[τ] space. Recall that sellers care about expected price and expected holding cost. The change in indifference curve shape considered here comes into play because we are looking at the indifference curves in E[P], E[τ] space and not E[P], E[hτ] space over which the primitive preferences represented by the utility function are defined. The shape of the indifference curves in E[P], E[hτ] space remains unaltered by changes in h.

  6. It can be shown that this relationship holds under the assumption that expected price and liquidity (shorter selling time) are normal goods as defined in standard consumer demand theory.

  7. This also means that houses in the sample have a window of exposure of four years or more for rental. This is intended to reduce spurious correlation between house age and rental status, since very new houses have a limited time frame for being observed as rental units while old houses have the entire 20 year time frame of the data period to be observed as rental units.

  8. This screen removes houses that have no porches, carports, or soffit overhang (eves)—an unusual configuration in the price range included in the sample.

  9. Full model estimates for these tables are in an appendix available by request.

  10. Only 69 houses in the $185,000–$320,000 price range were ever tenant-occupied over the twenty year period, which is about 6% of the entire number of houses that were ever renter occupied during the sample period.

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Acknowledgments

The authors thank, without implicating, an anonymous referee for helpful comments. This paper received the 2009 ARES Award for Best Paper in Innovative Thinking.

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Authors and Affiliations

  1. Department of Economics, Georgia State University, Atlanta, GA, USA

    Geoffrey K. Turnbull

  2. Department of Housing and Consumer Economics, University of Georgia, 213 Dawson Hall, Athens, GA, 30602-3622, USA

    Velma Zahirovic-Herbert

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  1. Geoffrey K. Turnbull
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  2. Velma Zahirovic-Herbert
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Correspondence to Velma Zahirovic-Herbert.

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Turnbull, G.K., Zahirovic-Herbert, V. The Transitory and Legacy Effects of the Rental Externality on House Price and Liquidity. J Real Estate Finan Econ 44, 275–297 (2012). https://doi.org/10.1007/s11146-010-9235-6

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