Dealing with neighborhood life cycles

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Published: July 24,2011

Tags: MBJ column, Phil Hardwick

The 2010 census served as a wake-up call for more than a few communities. Many local officials saw the numbers and realized that even though their cities might be growing overall there were parts that were changing in ways that were not anticipated. It became time to learn about neighborhood life cycles.

Most things have a life cycle. The two life cycles we hear about most are the human life cycle and the product life cycle. The stages of these life cycles are birth, growth, maturity, decline and death. Some life cycles have a revitalization stage, and thus can have what amounts to a second life. Product marketers have strategies to deal with each cycle in order to maximize sales. It is known as product life cycle management. For example, right after a product is born advertising costs are high because it must be introduced to the market. As it is accepted by the market, competitors enter the market and offer alternatives. Increased competition leads to price declines. In order to maintain market share the marketer then promotes brand differentiation.

Neighborhoods are similar in many ways. As the neighborhood is developed and grows prices of residential properties grow and increase in value. When the neighborhood reaches the maturity stage it too faces competition from similar or newer neighborhoods at which point property values tend to stop rising. When neighborhoods decline the property values begin falling. Then the critical point is reached. The neighborhood begins to revitalize or it dies, at which time houses are literally vacated and begin decaying.

Revitalization, on the other hand, can occur in several ways. One often-discussed revitalization trend is gentrification. Merriam-Webster defines gentrification as, “the process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents.” Those poorer residents moved into the neighborhood after it reached the maturity stage and began declining. Another way for a neighborhood to revitalize is to take advantage of market trends. As the first wave of homeowners move to larger homes they sometimes leave behind houses that they cannot sell for one reason or another. This leads to the decision to rent the house that was constructed during the growth stage of the neighborhood. So why do growth stage homeowners move away? Generally, it is because of their ability to afford a larger house with more amenities. In one sense, it is all about demographics and economics. So let us pause and take a look at the product.

In 1950 the average square footage of a single family residence was 983 square feet, according to the National Association of Home Builders Housing Facts, Figures and Trends report. Not only was that a small house by today’s standards, it contained few of today’s modern amenities such as central air-conditioning and heating, two-car garage, modern appliances, etc. Taking those factors and the inflation factor into consideration it is apparent that the price of the average single family residence has not really changed much at all. By 1970 that so-called average house had grown to 1,500 square feet, and by 2005 it had swelled to 2,414 square feet.

The price of that average 2,414 square foot home becomes less affordable over time if incomes are not rising fast enough to create a demand for that product. Average home prices in the United States rose from around $25,000 in 1970 to over $260,000 right before the real estate debacle of 2008. If the product is less affordable then the price usually goes down or, as mentioned above it is rented instead of sold. And it is this rental situation that affects neighborhoods, and is general a measure of the beginning of the decline stage. Over time the condition of the properties will tend to change and deteriorate, and properties will tend to be worth less than similar ones that are newer. As the dwellings become run down with age or neglect and will tend to attract people of lesser means seeking the most affordable housing.

So what can local officials do? What are the exceptions to the above patterns?

When older neighborhoods are located close to favored schools, transportation corridors, downtown, entertainment, cultural or employment centers that can cause a previously declining neighborhood to become very popular and property values to rise dramatically, according to Harry E. Davis, a certified real estate appraiser and real estate author in Austin, Texas. He points out that supply and demand are driving forces for property values and can be influenced by such things as financing that favors rehabilitation or remodeling efforts, migration of new residents from more expensive areas, or local population increases that increase competition for available housing. So what may once have been a neighborhood in decline becomes more desirable and sought after. Likewise, neighborhoods that are still in decline may soon realize increasing popularity as economic and social conditions change.

Local officials should educate themselves on the subject of neighborhood life cycles, be able to identify which cycle their neighborhoods are in and be creative in their strategies to deal with neighborhood revitalizations.

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