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Homeowners and Neighborhood Reinvestment

Duke University Press

Introduction

Neighborhoods, Reinvestment Policy, and the Homeowner

The vast majority of Americans reside in homes but live in neighborhoods. The demographic, socioeconomic, and physical characteristics of the areas immediately surrounding peoples' dwellings clearly are crucial determinants of the well-being of all but the most reclusive residents. And what happens to these characteristics over time is never certain. Many neighborhoods retain their essential character for generations. Others seem to deteriorate, either gradually as blight nibbles away at a once-healthy environment, or suddenly as some traumatic event such as racial transition or a distasteful nonresidential land use impinges upon them. Still others, after languishing for years in a decayed state, are miraculously rejuvenated as a new set of residents move in and renovate the homes.

Because the neighborhood is so crucial to the quality of urban life, the questions raised by these complicated patterns of stability, decline, and rebirth capture the attention of citizens, analysts, and policymakers alike. Is neighborhood decay inevitable as the resident population ages? To what degree is home reinvestment dependent upon owners' financial wherewithal? Is the level of maintenance of property tied to the race of the owner? Do older structures inexorably decay and therefore erode the neighborhood environment? Are housing reinvestments always discouraged in deteriorated neighborhoods? What role, if any, do social norms and interrelationships in the neighborhood play in encouraging home upkeep? How does the presence of nonresidential land use in the area affect investment decisions? Do residents have to be satisfied with their neighborhood before they are willing to reinvest? To what extent do the actions of one homeowner influence the behavior of others nearby? Does a rapid turnover of ownership lead to decay? What role do owners' expectations have in shaping their investment choices? What happens if ownership passes from owner-occupant to absentee owners?

How these questions are answered will crucially shape the sorts of public policies that are developed to ensure an adequate level of neighborhood reinvestment. For example, if elderly homeowners were found to be particularly prone to under maintain their dwellings, special upkeep assistance might be designed for them, or they might be encouraged to move into different, more easily maintained quarters. If the willingness to reinvest were present, but the financial capability to do so were absent, the public sector might institute a program of home repair grants. If willingness to reinvest were absent due to pessimism about neighborhood trends, policies to boost confidence through investments in new sidewalks, lighting, and plantings in the area might be suggested. If rapid racial transition were proved deleterious to housing upkeep, strategies to promote gradual, widely dispersed integration would be indicated.

Whether for lofty purposes (protecting the commonweal from the vagaries of the unfettered market) or more prosaic ones (preserving the property tax base), there is no doubt of the consistent interest shown by public policymakers at all levels of government in spurring neighborhood reinvestment. What is less consistent are the answers to the above questions implicit in the spectrum of programs that have been promulgated over the years (see Strickland and Judd 1982). At the federal level we have witnessed such initiatives as Model Cities, the Community Development Act, the Community Reinvestment Act, and housing rehabilitation programs like Section 8 and Homesteading. At the local level, efforts embodying such diverse components as housing and zoning regulations, public infrastructure improvements, subsidized grants and loans for home repairs, and incentives for homeownership have been observed.

Have these policies proved to be an effective use of public resources? Clearly, an answer can be found only after a careful analysis of their impact on the preeminent group of investors in neighborhood housing: owner-occupants of single-family homes—the "homeowners." Indeed, at the aggregate level, the magnitude of the actions that homeowners regularly undertake to maintain, upgrade, or downgrade the quality of their homes commends them as the largest single group of housing producers in the nation. In recent years homeowners have spent over $30 billion annually on maintenance, repairs, and improvements, or almost $700 per dwelling. This represents about two-thirds of all such expenditures on the existing stock of residential dwellings, and about three-fourths of the annual value of new construction of single-family homes. Thus, in large measure the future of our housing stock, and, by implication, of most of our urban neighborhoods, rests with the homeowners.

It is the fundamental premise of this book that we must understand the behaviors of homeowners regarding the upkeep of their dwellings if we are to comprehend the origins of neighborhood change and to develop appropriate public policy responses to such dynamics. Will homeowners in a given neighborhood maintain their dwellings at constant quality and choose to remain in them for extended periods? If so, a neighborhood will tend to remain stable both in terms of physical quality and of household composition. Will homeowners upgrade their dwellings, thus enhancing the physical environment as well as local property values, and perhaps encourage thereby the displacement of less well-off renter households in the neighborhood? Or will homeowners allow their homes to deteriorate, hastening their occupancy by lower-income homeowners or even conversion to absentee-owned rental dwellings?

The decision by homeowners to maintain or alter the quality of their homes (hereafter called "upkeep") is a complex one indeed. Even though the home typically represents a significant financial asset for the homeowner, the homeowner's household derives current use from living in the shelter over and above its eventual market value. Furthermore, the decision to sell the asset is typically connected with moving the household to a different dwelling. Thus, the housing upkeep calculus involves an amalgam of investment, consumption, and expected mobility considerations by the homeowner.

The individual home is an important item of consumption, both in terms of the portion of the household budget devoted to it, and as a complement to a wide array of other economic and social activities undertaken by homeowners. But the consumption of housing is unique because the satisfaction or sense of well-being gained from it does not depend solely on the quantitative and qualitative characteristics of the individual occupied structure and the parcel on which it is located. In addition, the neighborhood in which the house is located plays a vital role in determining the consumption (as well as asset) value of the dwelling. However, unlike features of the individual structure and parcel, neighborhood characteristics are largely beyond the control of the individual homeowner. Two distinct dimensions of the neighborhood can be identified that may impinge on the use value and asset value of the dwelling. The physical-demographic dimension consists of such things as the condition of neighboring structures, quality of local public services, air pollution levels, and the characteristics of neighboring households like socioeconomic status, age, family composition, and race. The social-interactive dimension refers to the nature and intensity of social interrelationships between the homeowner and the neighbors.

To add even more to the complexity, the social-interactive dimension may play a role beyond influencing a homeowner's enjoyment from the home. Both directly and indirectly, the social neighborhood can influence the homeowner's upkeep decision. Directly, a strong sense of neighborhood social cohesion can encourage homeowners to maintain or upgrade their property, and can discourage them from falling below neighborhood norms for minimal housing quality. Indirectly, homeowners' values, perceptions, and expectations, which form the basis of their upkeep calculus, may be altered by the social-interactive dimension of neighborhood; "confidence" may be instilled where neighbors identify closely with one another and the collective interest.

Finally, the vulnerability of housing to neighborhood effects, coupled with its extreme structural durability, means that current upkeep decisions are based heavily on expectations about the future that typically are held with some uncertainty. Estimates must be made as to if, how, and when the neighborhood will change, and whether plans for duration of tenure in the area should be revised. How the market will eventually evaluate any contemplated modifications to the dwelling must also be ascertained.

In sum, to comprehend adequately the upkeep activities by homeowners it is necessary to develop theoretical and empirical models that take account of the complexities flowing from the special nature of owner-occupied housing: the dual role played by the homeowner as housing consumer and investor, the significance of perception and expectation, and the influences of the physical, demographic and social-interactive dimensions of the neighborhood. In the face of this complexity, previous scholarly analyses have unfortunately suffered from a case of disciplinary myopia. The analyses of economists have attempted to specify rigorous theoretical models of homeowners' upkeep behavior, but have assumed away crucial aspects, like joint consumption-investment considerations, expectations, and neighborhood social-interactive characteristics, in order to facilitate mathematical manipulation (see Dildine and Massey 1974, Mendelsohn 1977, Ingram and Oron, 1977). Analyses with a sociological or community-organizing focus have stressed the importance of social relationships, but have provided neither a clear behavioral model through which such relationships may work nor any compelling empirical evidence of their independent influence on upkeep; (see Ahlbrandt and Cunningham 1979, Clay 1979, Taub, Taylor, and Dunham 1984). Urban planners have focused on housing upkeep in the broader context of neighborhood change, but have placed great weight on factors like confidence, without making clear the implicit behavioral assumptions, and have supported their claims only with casual empiricism (see Public affairs counseling 1975; Goetze 1976, 1979; Downs 1981).

Given these piecemeal approaches, it is not surprising that conventional analyses about homeowners and neighborhood reinvestment are rife with claims that seem plausible on the surface. For example: lower-income owners are more likely to let their houses visibly decay; home upkeep is purely a matter of economics; long-term residents are good for upkeep because they are "committed to the area"; owners always invest more when they foresee property values rising, and vice versa; satisfied homeowners will invest more in their homes; nonresidential land uses nearby discourage upkeep; public subsidies for home improvements are wasteful because they merely substitute for private funds that would have been invested in the absence of subsidies. Unfortunately, none of these statements is correct.

This book represents an attempt to bridge the fragmented set of earlier investigations and provide a comprehensive, multidisciplinary treatment of homeowners' housing upkeep behavior. It explores the possibility of influencing this behavior through public policies, always taking into account the larger context of neighborhood change. In the process the fallacies embodied in the aforementioned "conventional wisdoms" are revealed.

More specifically, the approach considers five sets of characteristics that underpin homeowners' behavior: i) dwelling, 2) owner, 3) physical-demographic neighborhood, 4) social-interactive neighborhood, 5) public policy. These characteristics shape home upkeep decisions both directly and indirectly. They do so first by influencing homeowners' evaluations of their dwellings and their neighborhoods, and their expectations about future changes in the area. All these subjective attributes contribute to the formulation of homeowners' mobility plans—expectations about how long they will continue to reside in the neighborhood. In addition, expectations about neighborhood and mobility ultimately affect housing investment. The book explains each of the causal linkages theoretically and then estimates their parameters empirically, using multiple regression analyses of data collected from two urban housing markets.

Guideposts for the Reader

Although this book is intended to be of interest to a wide spectrum of analysts, researchers, and policymakers, not all of its chapters may be appropriate for every reader. The following is intended to provide guideposts for those who may wish to focus on sections in which they have particular expertise or interest.

The book is divided into three main sections. The first, consisting of chapters 2 and 3, involves theoretical analyses of homeowners' housing upkeep behavior. Chapter 2 provides the overall conceptual framework that underpins all subsequent chapters. It is written in nontechnical terms and should be accessible to all readers. A rigorous theoretical model of upkeep behavior is specified in chapter 3. Of special note is this model's incorporation of neighborhood social interaction into the economic upkeep calculus, and its ability to predict different sorts of strategic interactions between homeowners based on their preferences and the circumstances in which they find themselves. Indeed, this model supplies a rationale for several empirical observations noted in later chapters that are inexplicable by conventional theories. Chapter 3 is highly technical, however, and should be omitted by readers unfamiliar with formal microeconomics.

The book's second section (chapters 4 through 10) presents empirical analyses designed to quantify the relationships posited and provide a test of the general theoretical framework. Data come from replicated homeowner surveys conducted in 1975 in Wooster, Ohio, and in 1980 in Minneapolis, Minnesota. These data bases and the sampling and interviewing procedures employed are described in chapter 4. Readers uninterested in such details may skip this chapter. An empirical investigation into the various aspects of the neighborhood is conducted in chapter 5. Factor analysis is used to discern common dimensions represented in an extensive series of variables proxying for numerous physical-demographic and social-interactive characteristics of the neighborhood. Different spatial scales of neighborhoods are also considered, ranging from adjacent dwellings, to blocks, to several square blocks, to census tracts. The results yield a rich, intuitively pleasing array of distinct neighborhood components that are employed as explanatory variables in subsequent models. Other independent variables that proxy for characteristics of the homeowner, the occupied dwelling, and public policies to encourage home upkeep are defined here as well. Those concerned about how neighborhood may be defined operationally should find chapter 5 of special interest. Others may simply refer to the glossary of variables found in the appendix.

Chapters 6 through 8 develop both theoretically and empirically three subcomponents of the conceptual model of home upkeep behavior: residential satisfaction, neighborhood expectations, and homeowner mobility plans. These three aspects of homeowners have frequently been investigated in their own rights (over and above their ultimate effect upon home upkeep), and will also be viewed in a similar light in these chapters. That is, each chapter contains an in-depth theoretical exploration into a given subcomponent, a review of previous empirical work on the subject, and a multiple regression analysis employing both data bases. Readers concerned only about how these three factors influence upkeep behavior may proceed directly to chapter 9.

The primary concern of the book, home upkeep activity, is empirically investigated in chapter 9. The multiple regression model employs as independent variables characteristics of the homeowner, the dwelling, both physical-demographic and social-interactive neighborhood dimensions, and (for the Minneapolis sample) public subsidies for home upkeep. The intervening variables are the three subcomponents noted above: home-owner's evaluations, expectations, and mobility plans. Three alternative dependent variables are employed as measures of upkeep: the probability of choosing an upkeep strategy involving the expenditure of funds, the amount of expenditure once such a strategy has been chosen, and the probability of pursuing a strategy resulting in exterior home defects. As with chapters 6 through 8, chapter 9 presumes a familiarity with multiple regression models.

Chapter 10 provides a compendium of the empirical results gleaned from part 2, and is thus recommended for readers unfamiliar with or uninterested in the details of the regression models. This chapter also demonstrates how these results can be used to predict changes in the aggregate home upkeep levels in a neighborhood, given alterations in that area's physical-demographic and/or social-interactive character. Of special interest is the application of the model results to understanding the consequences of neighborhood succession, racial transition, and gentrification.

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Excerpted from Homeowners and Neighborhood Reinvestment by George C. Galster. Copyright © 1987 Duke University Press. Excerpted by permission of Duke University Press.
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