Neighborhood Markets and Vacancy
Systemic, or entrenched, property vacancy is the result of a deep imbalance between property supply and demand. Until this real estate market imbalance is addressed, systemic vacancy will continue. It is imperative that community leaders understand how real estate markets function in order to implement effective strategies.
Why housing markets are so critical
A neighborhood’s vitality is the sum of how attractive it is as a place for people to live, including the desirability of its housing stock, its safety, the quality of its schools and natural environment as well as the degree to which its residents are committed to it, and engaged with the neighborhood and one another. That vitality is powerfully affected by the extent to which individuals choose to live in that area rather than other areas to which they could move, given their means and their locational needs. This is particularly true in 21st-century America, where both people and jobs are highly mobile, compared to previous centuries.
When increasing numbers of people choose to live in a neighborhood, the area’s real-estate market becomes stronger. Increased real estate market strength – reflected in strong housing prices and a healthy rate of appreciation over time – will most often also lead to important changes in the way area property-owners behave. Both homeowners and absentee owners are more likely to invest in their properties, contractors are more likely to build new infill housing and rehabilitate vacant properties, and there will be fewer tax delinquencies and foreclosures. Residents who see their neighborhood improving are likely to be more attached to the area. Upwardly mobile homeowners will be more likely to stay in their present homes – or buy new homes in the same neighborhood – rather than move out.
At the same time, simply having a competitive residential market does not ensure a neighborhood’s vitality. While real estate change can trigger positive change in other neighborhood conditions, it does not guarantee it. Higher housing costs, particularly when they are spurred by regional housing shortages or speculation rather than enhanced quality of life, can undermine the social fabric that gives a neighborhood its vitality, triggering changes – such as reduced affordability and greater residential overcrowding – that may reduce, rather than improve, the quality of life. Even where higher costs are grounded in sustainable improvements in the neighborhood’s quality of life, as the neighborhood improves a stronger market may increase pressure on lower-income residents by making the neighborhood significantly more desirable to others of higher incomes.
There is no single way to eliminate the tension between market change and potential problems for a neighborhood’s lower-income residents, but the ability of any stakeholder to implement a useful solution for a particular community hinges on one critical step: the ability to think clearly about the neighborhood from a market perspective and to frame a strategic approach to neighborhood change that recognizes the value of both fostering a stronger real-estate market and fostering equitable, balanced revitalization. In other words, to lead, not follow the change.
Every strategy to foster any type of neighborhood change strategy is based on assumptions about the local conditions. It is difficult to develop an effective strategy either to move the housing market or mitigate its effects unless one understands the neighborhood’s market conditions and dynamics. Without that information, many neighborhood strategies are little more than guesswork. In contrast, an understanding of the area’s market features can help practitioners and policymakers to craft informed decisions about goals and strategies for guiding neighborhood change. For example, in an area with a weak housing market, the goal is likely to be to build a stronger one; in an area with a rapidly improving market, it may be to preserve affordable housing or minimize displacement.
Understanding Neighborhood Markets and Change
All neighborhoods are different. They vary in location, the character of their housing stock, or their mix of housing, shopping and industry. All neighborhoods are affected, however, by a similar combination of social, economic and other forces.
The forces that trigger change in a neighborhood’s real estate market come from both outside and inside the neighborhood. They include internal physical, social and economic changes, as well as citywide, regional and even global market and economic forces. As the housing market – the demand for houses and the prices they command – changes, other features of the neighborhood change. Housing market change is not only a powerful force for other forms of neighborhood change; without a healthy housing market, it is difficult, if not impossible, for a neighborhood to become a vital, healthy one.
FACTORS AFFECTING NEIGHBORHOOD MARKETS
When it comes to the housing market, neighborhoods tend to fall along points of a continuum, from the strongest neighborhoods, with the greatest housing demand and the highest prices, to the weakest, where there is little demand and prices are low. There is often a close relationship between the strength of a neighborhood’s housing market and many other factors, including the tax delinquency, the vacancy rate, the homeownership rate, the level of homeowner investment in their properties and the volume of new construction.
While there may be as many points along the continuum as there are neighborhoods, most fit into a finite number of categories. By assembling information on the factors that relate to a city’s or region’s neighborhood market conditions, one can create a city- or region-specific housing market typology of neighborhoods. The figure below provides an example of a housing market typology.
SIX-CATEGORY TYPOLOGY OF NEIGHBORHOOD MARKET FEATURES
Certain factors tend to be associated with one another. In areas with high housing prices, for example, both owner-occupied and rental properties will usually be better maintained, and vacancy rates will be lower, than in areas with lower prices. Homebuyers are more likely to be owner-occupants than absentee buyers, and infill lots will quickly be developed by private builders. Historically, most community development corporations (CDCs) have tended to work in neighborhoods that fall into categories one through three, where market conditions are weaker, and the intervention of a local government or a nonprofit community-based organization may be critical to the future health of the neighborhood.
Changes in any of the features shown in the typology often highlight meaningful neighborhood change. For example, an increase in the share of one- or two-family houses bought by absentee owners in a high-value area can be a warning sign of potential decline, while an increase in the number of middle- or upper-income buyers in a lower-value area may reflect positive housing-market change.
As a neighborhood changes, the programs and activities that are most effective in achieving community goals will change. A community must understand how to shift from an environment where market-building is the priority to one where the focus is on preserving affordability and minimizing displacement, and back again if the market changes.
Within that broad framework, neighborhood change demands regular and frequent reappraisal of the specific programs and activities being pursued. For example, a land banking strategy may work well when the demand is weak and land is inexpensive. As the housing market gets stronger, it will not work as well and ultimately may cease to be cost-effective. At that point, an inclusionary program, requiring developers to include affordable housing in market-rate developments, which would have had little chance of success in a weak market, may become not only feasible, but a highly productive strategy to create affordable housing in a strong-market environment.
Analyzing neighborhood markets and change
Understanding a neighborhood’s housing market conditions provides merely a snapshot of a moment in time. It can only tell a City or community leader where to begin. Neighborhoods are constantly changing, not only in their real estate market but in other ways that influence housing demand, such as crime, neighborhood schools or small business activity. Thus, stakeholders need to be able to track how the neighborhood is changing, so that they can see what strategies are working, and when to phase them out in favor of new ones.
To describe neighborhood conditions and track them as they change, a variety of academic institutions as well as organizations such as the Baltimore Neighborhood Indicators Alliance have developed what are known as “neighborhood change indicators” – statistics and other measures that enable a community to assess where it stands and where it is going, to evaluate its strategies and change course as conditions change. Indicators of housing market change can include house prices, the number of home sales, the incomes of new homebuyers or the number of property-tax arrearages. Overall neighborhood change can be measured through many other indicators, including crime rates, incidence of health conditions such as lead poisoning or asthma, new business start, or organizational participation.
One critical aspect to understanding neighborhood change is to analyze how property vacancy and conditions have shifted. For data resources on these variables, see Determine your vacant property issues.
Local academic institutions, nonprofits, or individual researchers can be a critical resource to help local leaders analyze their neighborhood markets and build an indicators system, as has been the case in communities such as Cleveland, Detroit, Memphis, and Trenton.
For more information on how to create a market index or a typology, see Community Progress’ Neighborhoods by Numbers: An Introduction to Finding and Using Small Area Data. For examples of neighborhood market typologies, see our Trenton or Hartford reports.
The National Neighborhood Indicators Partnership at the Urban Institute is a national coalition of local data intermediaries that also has resources related developing local indicators and understanding broader aspects of community vitality.