Compact, mixed-income performed better in housing downturn, study shows

Low-density suburbs lost more value than walkable neighborhoods in the housing downturn — and low-income city neighborhoods also suffered, according to a study of the Philadelphia region funded by the Congress for the New Urbanism.

The study looked for reasons for variability in price performance and found new urban characteristics such as density, mixed-use, diversity in income, and access to transit play a role.

The $10,000 study,  “The Correlates of House Price Changes With Design, Density and Use: Evidence From Philadelphia,” examined about a quarter million transactions in 340 zip codes in the region during 2007-2012. The author is Kevin Gillen, an economist and senior research consultant at the University of Pennsylvania’s Fels Institute.

Major findings:

• The suburbs performed less well than the city. Price declines were higher in the relatively low-density suburbs (32.7 percent),  and less in City of Philadelphia (26.7 percent). In Center City, prices declined as little as 1.9 percent in one case and 20 percent on average — less than the regional average. That’s despite the fact that this area saw the greatest increase in supply in the form of new condominiums, Gillen says, which should have depressed prices.

• Some suburbs did relatively well. Mixed-use, compact, suburbs with transit access declined less than the regional average — about 20 percent. Typical non-new urbanist communities declined 35 percent. Areas that were extremely sprawling declined as much as 49 percent, according to the report.

• This pattern reversed that of the previous major downturn, from 1989-1996. Two decades ago,  “house prices declined the greatest in the core urban center (33.7 percent in Center City), second-most in the central city of Philadelphia as a whole (17.6 percent) and the least in the lower- density areas the suburban counties (14.3 percent),” the report stated.

Thus, “not only is the magnitude of the recent housing downturn unique, but its structure is as well,” he says. Gillen theorizes that energy costs, which rose significantly over the last decade and a half, are partly to blame, “thus making long commutes in a car and heating and cooling a larger suburban home relatively more expensive.” Second, a shift in consumer preference in favor of urban living, especially among young adults, has influenced prices.

Finally, lower crime and improved quality of life have made older, walkable neighborhoods like those around Center City more attractive. Twenty years ago, Center City was almost as distressed as the city as a whole. A Business Improvement District, set up in 1991, cleaned the area and attracted national retail tenants. Major revitalization followed, not only in Center City but also in surrounding neighborhoods.

Underperforming city neighborhoods

Some city neighborhoods saw large price declines, especially those inhabited mostly by poor people with high numbers of vacant properties and low incomes. Although these neighborhoods in north and west Philadelphia have a walkable infrastructure in the form of small blocks and sidewalks, they lack the same degree of mixed-use as better-performing neighborhoods. Vacant properties affect “eyes on the street,” the crucial quality identified by Jane Jacobs for a healthy urban place.

The poor performance of these neighborhoods — which already had low values prior to the recession — came as a surprise to Gillen. “I thought that these working class neighborhoods would have held their value better,” Gillen says. “The recession hit disproportionately on the young and working class, and for many it became impossible to get a mortgage. Homes in those neighborhoods are hit relatively hard.”

The city’s housing is inexpensive — averaging $110,000 per house — but it is highly variable. In some neighborhoods not very far from Center City rowhouses cost $40,000. In Center City, they might cost a million dollars, Gillen says. “In gentrifying neighborhoods that ring Center City it will cost you $300,000 to $400,000,” he says. The extremely low values in many neighborhoods raise the possibility of investment and gentrification in the decades to come. “In some parts of those neighborhoods the revitalization is already appearing. Drexel and Temple universities are investing significantly in their surrounding neighborhoods. Historically they walled themselves off from the low-income and high-crime surroundings. Recently they reversed that strategy, promoting more market-rate student housing and homeownership among faculty and staff.”

These institutions are following the lead of Penn, which pioneered similar community engagement in the late 1990s in what is called the University City District. In addition to efforts like lighting, signage, “public safety ambassadors,” and shuttle buses, Penn provided mortgage assistance to faculty and staff and founded a charter school. The school itself has raised values an average of $100,000 or more in its catchment area.

In both inner-city areas and distant suburbs the health and quality of the neighborhood were the determining factors in real estate performance.

Overall, “the perception that older town centers are riskier and lower value no longer seems to be true,” Gillen says. “It’s not complete reversal — I don’t think auto-oriented areas are doomed, but there is greater parity between [urban and suburban areas].”

Gillen’s findings support those of Christopher Leinberger in the Washington, DC, area. In the recent report “The WalkUP Walk-Up Call,” Leinberger found that mixed-use, walkable places with significant commercial development are performing much better than the DC region as a whole.