1/30/2008

Home Owners Beware

When it comes to owning a home, most people think homeowners can do what they want with the property. However, this is far fom the truth. Most subdivisions today belong to homeowner associations. The associations' guidelines or "covenants" are set up by the developers of the subdivisions. The interesting fact is that most developers rely on city laws to help them in regulating what homeowners can build on their property. This can sometimes cause problems. I read an article entitled "'Covenants' can Mediate in Neighborhoods". The article addresses an issue that arose when some homeowners became upset when a particular neighbor of theirs constructed an unfinished plywood shed on his own property. Although it was within the legal code of the city, they claimed that this eyesore would affect the value of their homes. There were no "covenants" within this association that addressed this issue. This is an important issue, however, especially during this time when homes across the nation are losing value from the decline in the economy. In my opinion, the shed either needs to be removed from the property or finished with siding or brick. I think that it would be the courteous thing for the shed owner to do. This eyesore, if not taken care of, will eventually decrease the resale value of homes in this area. The homeowner association should look into setting up "covenants" that cover such issues.

10 comments:

Reagan said...

The value of the property is determined by the square footage of the home and the value of comparable properties, not a shed that is made out of plywood. The price people are willing to pay for that home and the other homes for sale in the neighborhood will vary depending on a buyers taste and preferences. I doubt a plywood shed will have a damaging effect on the value of other homes in that neighborhood. A buyer might not be as attracted to the home with the plywood shed but if the homeowner really wants to sell their house I am sure they will make the shed presentable or take it down. Having an association dictate what you can or cannot do on your property might seem great to keep up a certain image in a neighborhood, until they decide you cannot do something that you want to do. In our society today it seems that the way to fix everything is with a set of rules that everyone is forced to comply with. How about being a friendly neighbor that offers to help finish the project. I doubt that will happen because the marginal benefit is not worth an hour of our time. We get much more pleasure out of complaining.

Dr. Tufte said...

Reagan: the time and effort to sell the property are part of the opportunity cost of selling it. Just because cash prices are inelastic with respect to sheds doesn't mean all the other aspects of selling the house are!

Dr. Tufte said...

Covenants are actually an application of the Coase' Theorem: he noted that private contracting is able to solve/address most externality problems.

And, that ugly shed is a negative externality. Covenants are a way to signal that creators of negative externalities will be punished.

Interestingly, a little known point of covenants is that failure to enforce them on the part of, say, a homeowner's association, is also an actionable tort offense.

Gavin said...

Extra Credit - Dr. Tufte
Regardless of differing preferences, the shed does have a negative externality on the neighbors. It is difficult to quantify the dollar amount of value lost due to the negative externality.

William said...

Dr. Tufte,
So are you in favor of having an association say exactly what you can and cannot do? I know in certaind areas associations are so strict that you can only choose between four colors to paint your house and you can't have certain plants. I think sometimes associations take it too far. I think I would have to agree more with Reagan, yes this is a negative externality, but I feel that it is not the big of a deal. I think so many times we focus too heavily on the small issues and don't look at the major problems. Now if the owner let his whole house go down the drain and left in a horrible condition then I think we should start to think about talking.

Emma said...

Dr. Tufte said that the shed can be viewed as an externality. This is a very true statement. I did not look at it as an externality when I first read the article. This makes since because if it was a beautiful shed then the neighbors would get a positive externality from the existence of the shed.

Emma said...

Dr. Tufte said that the shed can be viewed as an externality. This is a very true statement. I did not look at it as an externality when I first read the article. This makes since because if it was a beautiful shed then the neighbors would get a positive externality from the existence of the shed.

TheFindlay said...

Dr. Tufte
I think Reagan was right and you were trying to get some pleasure out of using and exclamation point! I could not find where Reagan said or inferred that all the other aspects of selling the house were inelastic. I think Reagan was spot on with shutting Emma down and sound in reasoning and logic.

TheFindlay said...

Dr. Tufte
I am glad we talked about the Coase’ Therom today in class because otherwise I would have not known what you were talking about. The thing is that there were no covenants that prevented the homeowner from building the shed. Furthermore there were no covenants that stated the shed was necessarily a negative externality. I agree that it may not have been the most neighborly thing to build an ugly shed but come on people; STOP LOOKING FOR THINGS TO COMPLAIN ABOUT!

Dr. Tufte said...

-1 on Emma - I already counted both comments, so now I need to ding you for the duplicate.

-1 on William for a misspelling.

William: I'm not in favor of covenants, per se. I just think that you buy in an area because covenants help maintain the value, but once you have bought in, many people will try and break them. This is known as time inconsistency in economics, and Kydland and Prescott won a Nobel prize for pointing it out.

Reagan is still way off-base. Assessed values are determined primarily by bedrooms and bathrooms, but if that was all there was to it we'd all live in Sunbow. But, that area is priced lower not because of bedrooms and bathrooms but because of other neighborhood aspects.

theFindlay: whether or not something is an externality has nothing to do with whether or not it has a covenant. Externalities are about external effects, covenants are a response to anticipating them.