The Capitalization of Building Codes in House Prices |
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Authors: | Randy E Dumm G Stacy Sirmans Greg Smersh |
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Institution: | (1) Department of Insurance, Real Estate, and Business Law, College of Business, Florida State University, Tallahassee, FL 32306-1110, USA |
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Abstract: | Some research shows that homes built under tougher building codes perform better in hurricanes. While houses built after the
implementation of the stronger building codes could be presumed to be “safer”, no study has measured the extent to which stricter
building codes are capitalized into improved property. This study measures the capitalization of stricter building codes into
house prices. In addition, the study examines whether homebuyers attach greater value to the stricter building codes after
the “reality check” of the 2004 and 2005 hurricane seasons. A hedonic pricing model is used to capture the differential effect
on house prices of the stricter 1994 South Florida Building Code for properties sold from 2000 through 2007 in Miami-Dade
County. The model also measures any increase in the marginal value of the stronger building code after the 2004/2005 storm
season. Models are estimated for the aggregate data and for three geographical zones based on risk exposure. Results show
that the stricter building code has a positive effect on selling price. The greatest effect is seen in the coastal zone, which
has the greatest risk exposure. Selling prices for homes built under the new code were about 10.4% higher than prices for
comparable homes built under the older, less strict code. The premium for safety is shown to decrease as the hurricane risk
exposure decreases. For geographical areas with less risk exposure, there is less capitalization of the stricter building
code into house prices. The post-catastrophe (“reality check”) variables show that, following the minimal impact of the 2004
hurricanes on the Miami area, the premium that consumers are willing to pay for structural integrity disappears. However,
after the 2005 hurricanes, which were more devastating to the Miami area, the building code premium returns. |
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