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Neighborhood Value Updated: West Philadelphia Price Indexes

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Since becoming actively involved in improving the quality-of-life, public services and homeownership rate in its own West Philadelphia neighborhood, the University of Pennsylvania has seen the performance of this housing stock outpace that of Philadelphia as a whole.

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Neighborhood Value Updated: West Philadelphia Price Indexes

  1. 1. Penn IUR Executive BriefNeighborhood Value Updated: West Philadelphia Price Indexes By Kevin Gillen, Econsult VP and Penn IUR Scholar And Susan Wachter, Co-director, Penn IUR 4/26/2011
  2. 2. University-supported housing outperforms Philadelphia housing since Programs’ inceptionSince becoming actively involved in improving the quality-of-life, public services and homeownership rate in its ownWest Philadelphia neighborhood, the University of Pennsylvania has seen the performance of this housing stock outpacethat of Philadelphia as a whole.After decades of remaining relatively uninvolved in the affairs of University City, Penn successfully sought the creation ofthe University City District in 1998. Shortly thereafter, the Guaranteed Mortgage Program was created to improve bothhomeownership and the quality of the housing in University City. Then in 2003, it helped create and fund the Penn-Alexander Charter School just a few blocks from the University’s border. In the ensuing years, the University Cityneighborhood has seen improved lighting and signage, lower crime, better educational options and an increase inhomeownership by University faculty and staff. But in a decade that has also seen unprecedented volatility in housingvalues, it is also worth examining how housing in University has changed in value relative to the market as a whole.The existing research on movements in house prices, however, is limited in several ways from allowing such a detailedand local examination on specific neighborhoods and policy interventions. For example, the Case-Shiller house priceindices, which are the most commonly cited national standard metric for house prices, are typically measured only at ametropolitan level, and are limited to only repeat sales. The latter prevents detailed, local examination of house pricesmovements, while the former can impart bias to an examination of house price movements by prohibiting new salesfrom entering into the sample. Our approach overcomes both of these obstacles by estimating house price indices forspecific neighborhoods in the Philadelphia area, and by using a hybrid hedonic approach that not only includes theuniverse of all sales, but also includes a much more expansive set of control variables that facilitates a more accuratemeasurement of house price movements over time. This results in the production of house price indices that are notonly more locally tailored to specific neighborhood movements in house values, but are also more accuratemeasurements of these movements.To examine this, we took the universe of all arms-length home sales in the years 1998-2011, and geo-coded them toassign each transaction to the respective areas that are supported by Penn’s various services and programs: • The University City District • Penn’s Guaranteed Mortgage Program • The Penn-Alexander Catchment Area (PASC)A hybrid hedonic regression was then estimated which regressed the (natural log of) price on each home’s physicalcharacteristics, such as size, age, density, and physical condition, plus the year that each dwelling sold. This last vectorof time-dependent variables is then used to construct a house price index that measures the underlying change in housevalues over time, after controlling for variation in the tangible characteristics of the homes that sold. This regressionwas estimated separately for just homes in the three subject areas, plus all West Philadelphia, Center City/Fairmountand Philadelphia county as a whole. The result is a set of house price indices measuring the relative changes in housevalues over time. They are shown in the following chart, with each index normalized to a value of 100 in 1998:
  3. 3. Nominal House Price Indices: 1998-2011 450 Phila. County 400 Center City West. Phila. 350 U. City PASC 300 GMP 250 200 150 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011As the chart illustrates, every one of these submarkets outperforms Philadelphia as a whole (represented by the thickblack line), during the past thirteen years. The fact that each line lies above the black line indicates that homes in thesesubmarkets appreciated in value by more than the average home in Philadelphia.To put specific numbers on these appreciation rates, we first deflated the indices by the rate of inflation during this timeperiod to convert them from nominal to real indices. The real (i.e. net of inflation) rate of house price appreciation wasthen computed as the simple percent change in the index from 1998 to 2011, and the results are given in the followingchart:
  4. 4. Real House Price %Change by Submarket: 1998-2011 PASC 211.5% U. City 101.4% West. Phila. 101.3% Center City 86.9% GMP 81.0% Phila. County 50.1% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0%During the past thirteen years, the average Philadelphia single-family home increased in value by 50.1% above andbeyond the general rate of inflation. Yet, homes in each of these submarkets outpaced this rate, often by substantialmargins, ranging from 81.0% in the GMP to 101.3% for all of West Philadelphia. In the PASC, which is the onlysubmarket to benefit from all three Penn-supported programs (improved schooling, homeownership and quality-of-life),the benefit is especially pronounced. Homes in PASC increased in value by 211.5%, or more than three times thecitywide appreciation rate.Lastly, to put some specific numbers on these changes in house values, we computed the average house price of homesin each submarket, for the years 1998, 2006 and 2011. The results are shown in the following charts:
  5. 5. Avg. House Price by Submarket $500,000 $450,000 $400,000 $350,000 $300,000 1998 $250,000 2006 $200,000 2011 $150,000 $100,000 $50,000 $0 West. Phila. GMP Phila. County U. City PASC Center CityAs the chart indicates, house price rose from 1998 to 2011 in each submarket, and then typically fell from 2006 to 2011.However, in the core areas of University City and the PASC, average prices on net actually increased from 2006 to 2011.Moreover, the total increase in house prices from 1998 to 2011 was sufficient to put house prices in these twosubmarkets to be on par with house prices in Center City, the highest-priced neighborhood in Philadelphia. So, not onlydid the University’s initiatives help to make its neighborhood one of the most desirable areas of the city, but also aneighborhood which has weathered the current housing downturn and retained its value much more so than other partsof the city.An additional metric of housing performance and neighborhood desirability is movements in rents over time. Morespecifically, the rent-to-income ratio is indicative of housing affordability for the rental (as opposed to owner) segmentof the housing market. The movements in the rent-to-income ratio from 1990 to 2010 in Philadelphia suggest adecrease in the affordability of the rental sector, as shown in the following charts:
  6. 6. Looking in more details to West Philadelphia, its rental sector is cheaper than center city (first chart) but its sub-areashave constantly higher rent to income ratio than Philadelphia at large by 2 to 7 percentage according to census data(second). After having increased dramatically between 1996 and 2000, the rent to income ratio in University City wentdown in the last decade according to the data collected by the Off-Campus services (third chart). This drop might comefrom an increased supply that alleviated pressure on overall rents.However, while both price and rent levels have overall implications for housing affordability, it is quite clear from thedata that they have not moved in tandem in the University City area of Philadelphia in the most recent decade. In fact,house prices have outpaced rents in appreciation during this period, which suggests that the households in UniversityCity has shifted in composition from renters to owners, and/or there are greater gains in the tenure decision of owninginstead of renting. Both are consistent with an increase in the neighborhood’s desirability during this period, as well asoptimistic expectations on behalf of households for this desirability to continue in the future.Dr. Susan Wachter is the Richard B. Worley Professor of Financial Management and Professor of Real Estate and Financeat The Wharton School of the University of Pennsylvania. Dr. Wachter is also Professor of City and Regional Planning atthe School of Penn Design and Co-Director of the Penn Institute for Urban Research.Kevin C. Gillen is a Vice President of Econsult Corporation. He publishes quarterly updates on the current state ofPhiladelphia’s housing market which can be accessed at http://penniur.upenn.edu/research/urban-development-strategies/projects

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