Do Property Rehabs Affect Neighboring Property Prices?

Abstract

We examine the effect of distressed property rehabilitations on neighboring property prices using a recently developed nonparametric method that accounts for very local confounding house price trends. We find that house prices around a rehabilitated property increase between 2.3 and 4.0 percentage points following the rehabilitation. Moreover, we estimate that the average rehabilitation generates an aggregate welfare benefit that is 3.8 times greater than the amount invested. Rehabilitation externalities are stronger for longer rehabilitations and greater rehabilitation investments, and they are prevalent even in areas with high rates of foreclosures. The spillover effect of rehabilitations operates through their salience as opposed to through a reduction in the supply of distressed properties, through property appraisals, or through homebuyers with higher income moving into the neighborhood. Overall, our results suggest that investing in property rehabilitations can be a useful tool to stabilize distressed housing markets.