The Impact of Housing Market Conditions on Residential Property Upkeep

Abstract

This paper assesses the impact of housing market conditions on the theoretically motivated and empirically observed negative relationship between loan-to-value (LTV) ratios and home maintenance expenditures. If the relationship is causal, then a down housing market will result in significantly decreased upkeep in the housing stock. The large rise and fall in home prices during the 2001–2009 period allows a unique opportunity to analyze the response of homeowners to changing housing market conditions. Data from the American Housing Survey are analyzed to confirm previous work that a negative relationship exists between LTV ratios and routine maintenance expenditures, however, this relationship does not move in the expected direction when examined along with temporal variations in market conditions. Panel analysis reveals a more complex story. Households most likely to be at risk for default decrease maintenance expenditures when default risk increases, but other households actually increased maintenance expenditures when the housing market conditions became less favorable.

Keywords:

• Public goods
• neighborhoods
• default risk
• home equity

Acknowledgements

I wish to thank Jim Murdoch and several anonymous reviewers for helpful comments.

Notes

¹ The natural log of maintenance expenditures was calculated as log(CSTMNT+1) so that the variable could be defined when maintenance expenditures were $0. A log-linear model was also used by Harding et al. (2000).

² 14.6, 14.6, 15.2, 11.9 and 10.8 per cent of reported maintenance expenditures are zero for 2001, 2003, 2005, 2007 and 2009, respectively.

³ Harding et al. (2000) investigate alternative definitions of LTV that have little impact on their results. Loan and home values used for calculating LTV were unadjusted for inflation.

⁴ See http://www.federalreserve.gov/releases/h15/data.htm

⁵ Full results are available from the author on request.

⁶ The time and housing units' fixed-effect coefficient estimates are available from the author on request.

⁷ Results available from the author on request.