Buzzword: Neighborhood Effect

What it means. This buzzword comes from Cambridge, Massachusetts, or more precisely, that neighborhood's Harvard University Joint Center for Housing Studies.

In the April 2008 paper "Good Home Improvers Make Good Neighbors," Kevin Park, a JCHS research assistant, defines neighborhood effect as "a situation where neighborhood conditions (including overall level of home improvement spending) impose costs and benefits or otherwise influence the behavior or actions of a homeowner. Similarly, the home improvement activities of an individual homeowner may impose costs and benefits on nearby property owners and thereby influence the general level of maintenance in the neighborhood." (Download a PDF of the paper here.)

In other words, upkeep is contagious, and the neighborhood as a whole benefits from homeowners' TLC.

Why the buzz? The housing market is still reeling—the foreclosure rate is climbing—and even the most optimistic economists aren't predicting a prompt recovery. Foreclosure is the heartbreaking result for homeowners who can't keep up with their mortgage payments. Herein lies the downside of neighborhood effect. Using a related buzzword, the Center for Responsible Lending refers to "subprime spillover," whereby a foreclosure on a home lowers the price of nearby single-family residences by 0.9 percent. The negative impact is cumulative—each additional foreclosure lowers values an additional 0.9 percent.

But that's the glass-half-empty view of neighborhood effect. Park's paper is largely about the positive impacts of home improvement. And as we observe in our August 2008 kitchen-remodeling special section, today's housing market actually makes it a good time to start a project: Contractors aren't swamped, and appliance retailers and home centers are offering more deals than ever.

Homeowners tend not to see past their property lines when calculating the return on investment of a project. But Park finds a "statistically significant effect of neighborhood home-improvement activity on home appreciation." Between 1996 and 2004, appreciation rates were 15 percent greater in neighborhoods where people spent a lot on home improvement than in low-spending ones.

So the next time your neighbors kick up a fuss over your ongoing renovation, or you over theirs, remember the concept of neighborhood effect.—Daniel DiClerico

Essential information: Use our new Home Improvement Guide interactive, which provides buying advice and more for appliances, tools, and building materials for every area of your home.

Protect Your Investment: Avoid shoddy home construction

A few years back, a Consumer Reports investigation found that 15 percent of new homes had serious problems and defects, requiring homeowners to spend millions of dollars on repairs. During that building boom, the fast pace of construction was a major cause of shoddy construction, according to experts interviewed for the story.

While today’s real-estate market has weakened significantly compared with the robust market of recent years, you still need to be on the lookout to avoid buying a flawed home. (Our exclusive interactive illustrates the problems to be wary of.)

Serious construction defects often present themselves in telltale ways, such as the deep cracks in a floor and an exterior brick wall shown here. (The owners of that home in Edmond, Oklahoma, ended up spending $60,000 to repair their new home.) If you see one or more of the following problems when you’re looking for a home or after you move in, hire a structural engineer to investigate.

Deep cracks in the foundation or basement walls can be signs that the foundation was laid on a poorly compacted base or improperly graded soil.

Sagging floors or leaning walls might be caused by a shifting foundation or structural problems with support beams. Sometimes problems can be associated with a poorly done renovation or addition that compromised key structural members.

Windows and doors that don’t sit well in frames or close properly could be the result of house-framing problems or even trace back to uneven settling of the foundation. If the beams, studs, and joists weren’t correctly sized or assembled, the whole house might not hang together well.

Wide cracks in interior walls could signal a foundation problem. Generally, though, fine cracks are cosmetic, the result of normal wood shrinkage when drying or even minor settling.

Water damage warning signs include mold, rot, and insect infestation in exterior walls; staining, swelling and discoloration on interior walls; and a musty odor. There are a number of possible causes, including improperly installed roofing; missing flashing around penetrations and joints; no moisture barrier in a climate that requires it; lack of a drainage space behind brick or siding; poorly installed windows and doors; holes in siding; plumbing leaks and trapped water-vapor condensation from moist air contacting cold surfaces.

Flooding and sewer and drain backups might result from poorly graded land or faulty sewer and water-main connections.

Switched hot and cold spigots could signal improperly installed plumbing.

Excessive heating or cooling bills might be a sign that air ducts are leaky or improperly connected. Be on the lookout if rooms don’t get cool enough or warm enough.

Electrical shorts that cause blown fuses or tripped breakers could point to an incorrectly installed electrical system. Other signs of electrical problems are outlets and switches that don’t work or are unexpectedly controlled or affected by electrical devices in other parts of the home.

Missing required permits indicates that building authorities have not performed the required inspections.

Take these steps if you think you have a serious problem with substandard home construction.

1. Hire a licensed engineer. The National Academy of Building Inspection Engineers can make a referral for a visual inspection. For a structural analysis, expect to pay $100 to $150 an hour.

2. Give the company a chance to fix the problem. You may have no choice anyway in states with “right to cure” laws. But don’t let warranties or statutes expire while you wait. Document your complaints with photographs, copies of written agreements and warranties, and a home inspection.

3. File complaints. Send your complaints to building and regulatory authorities in your state, such as a contractor-licensing board; your state and local consumer-affairs departments; and, if you suspect fraud or corruption, your state attorney general. Also contact the Federal Trade Commission.

4. Network. Contact Homeowners Against Deficient Dwellings or Homeowners for Better Building to contact other aggrieved homeowners.

5. Get legal help. As a last resort, contact a lawyer who specializes in construction-defect lawsuits. Your local bar association can help you find one.

U.S. home sales drop again

A pattern is starting to form for sales of existing homes—and it’s not a good one. The National Association of Realtors reported today that existing-home sales in June dropped for the fourth month in a row, to a seasonally adjusted annual rate of 5.75 million units. Sales of single-family homes, town homes, condos, and co-ops slid 3.8 percent from May and 11.4 percent from June 2006.

“Home buyers have been getting mixed signals about the housing market, which is causing some of them to hesitate,” said Lawrence Yun, senior economist for the NAR. “Mortgage interest rates have risen recently, and tightening lending standards are continuing to hamper sales, but fewer risky loans will put the market on a healthier path. Although general buying conditions remain favorable for long-term home buyers, it appears some buyers are looking for more signs of stability before they have enough confidence to make an offer.” The national average commitment rate for a 30-year, fixed-rate mortgage was 6.66 percent in June, according to Freddie Mac, up 0.4 percent from May and about the same as the June 2006 rate of 6.68 percent.

“Two bright spots in the June report are a decline in housing inventory and a modest gain in home prices,” said Yun. “Although we’ve seen seasonal month-to-month price increases over the past four months, this is the first time in 11 months that the median home price is higher than the year-ago price.” The inventory of existing homes fell 4.2 percent in June, though that still represents an 8.8-month, according to the NAR, which also reported that national median sales price for all existing homes rose slightly, to $230,100 in June, up 0.3 percent from June 2006.—Steven H. Saltzman

Essential information: Read “How to sell your home in a down market” for advice on increasing the odds that you'll find a buyer for you house. And if you're considering buying a new home, check out "Housewrecked," which explains how to avoid purchasing a new house with hidden defects. Also watch our exclusive interactive on the warning signs of shoddy homebuilding.

Americans remain optimistic about housing market

Here are some compelling, perhaps even telling, statistics: Fifty-five percent of American homeowners believe they could sell their home today for more than they could have a year earlier. And 74 percent feel they could sell their home within the next six months at the price they think it's worth. Those are just some of the results from a recent nationwide phone survey of 1,007 American adults by the Boston Consulting Group.

That apparent confidence in the housing market would seem to confirm the notion that fewer Americans are reading newspapers and watching the evening news. What else would explain the rose-colored-glasses optimism in the beleaguered housing sector, which, by many accounts, is in a major slump? Apparently many homeowners haven’t seen or heard the phrase “subprime-mortgage meltdown.”

"Americans believe their homes are still their best investment. They're positive about their homes' value and believe in a bounce-back in residential real estate overall," said Michael J. Silverstein, a senior partner at Boston Consulting who specializes in consumer spending.

Some other survey numbers:
• 85 percent of Americans think their house will be worth more in five years than it is now.

• 63 percent believe real estate remains a good or excellent investment.

Still, a dose of reality has crept into the picture. Sixty-four percent of Americans feel the drop in home prices is hurting the U.S. economy at least moderately. And 52 percent believe the housing slide will last two years or less, while 22 percent see it lingering for at least five years.—Steven H. Saltzman

Essential information: Read this recent blog entry if you’re planning to sell your home in this tough housing market.

Uncovering what lurks below

We met with the folks from Environmental Data Resources the other day. The Milford, Conn.–based company is a provider of environmental information for commercial properties.

They came to our offices to talk about their recent foray into the world of residential real estate. I won't bore you with too many details, but you can buy a detailed environmental report on a property you’re buying or selling, which the company generates from its databases of municipal, county, state, and federal records. A report ($150 for a residential property) includes information on the presence of red flags such as EPA Superfund sites (like the Bowers Landfill in Pickaway County, Ohio, shown here; the location was remediated into wetlands), hazardous-waste sites, and leaking underground oil tanks on or near the property. EDR’s Web site provides further information.

Regarding oil tanks, EDR research released today indicates there are more than 400,000 leaking underground oil tanks nationwide and that more than 1,000,000 reports of properties with hazardous contamination spills (oil, gasoline, industrial chemicals) have been filed across the U.S., according to government records.

“These numbers highlight the need for consumers to better understand what is present on and around their property or the property they are considering buying,” said Robert Barber, CEO of EDR, in a press release. “The presence of environmental contaminants in the ground beneath a home and the neighborhood around it—and the potential impact they could have on a family’s health—is something homeowners and home buyers should investigate for their own safety.”

Obviously EDR and similar companies like Property I.D. don’t release this information only for the public good—they want you to buy their services, after all. (Note that, according to EDR, 93 percent of the reports it generates come out “clean.”)

But given the modest cost and the tedious work required to uncover the information EDR provides—including Freedom of Information Requests to get the same government databases the company sifts through, for instance—it might be worth it to let the pros handle this type of work for you. That way, you can focus on finding the right town and the best loan for your situation.—Steven H. Saltzman