The Capitalization of Building Codes in House Prices

Posted: 29 Aug 2010

See all articles by Randy E. Dumm

Randy E. Dumm

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law

G. Stacy Sirmans

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law

Greg Smersh

University of South Florida

Date Written: August 26, 2010

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 percent 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.

Keywords: building code, safety, housing prices, catastrophic risk, hedonic pricing model

Suggested Citation

Dumm, Randy E. and Sirmans, G. Stacy and Smersh, Greg, The Capitalization of Building Codes in House Prices (August 26, 2010). Journal of Real Estate Finance and Economics, Vol. 42, No. 1, 2011, Available at SSRN: https://ssrn.com/abstract=1666280

Randy E. Dumm (Contact Author)

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law ( email )

College of Business
Tallahassee, FL 32306
United States

G. Stacy Sirmans

Florida State University - Department of Risk Management/Insurance, Real Estate and Business Law ( email )

College of Business
Tallahassee, FL 32306
United States
850-644-8214 (Phone)
850-644-4077 (Fax)

Greg Smersh

University of South Florida ( email )

College of Business Administration Dept. of Finance
St. Petersburg, FL 33701
United States
727-553-1619 (Phone)

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