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.