Tuesday, September 15, 2009

Living Next to the Obamas: Worth $500,000?

The home next to Barack Obama's in Hyde Park, Chicago, has just gone on the market. Reports The New York Times,

The price? Hard to know, real estate agents say, because not since Richard M. Nixon lived in a New York City apartment has the market tried to assess the value of immediate proximity to the president in a dense urban neighborhood. (The Greenwood Avenue neighbors are separated by about 20 feet, a line of thin trees and an iron fence that is more decorative than forbidding.) The Grimshaws paid $35,000 in 1973; other homes in the area have sold for $1 million to $2.5 million.
“We think there’s a premium,” said Matt Garrison, the listing agent with Coldwell Banker, who does not intend to put an asking price on the house. “We don’t know what the Obama effect is.”
Mr. Garrison said he had tried to scout similar parcels of residential property, but pointed out that there was no family living next door to the White House.
“I tried to look at 12 Downing Street, but that’s all offices,” Mr. Garrison said, referring to the building next door to the British prime minister’s residence in London.

Needless to say, the Obamas aren't spending much time in Chicago these days. Thus the value of living next-door to "Barry" and Michelle amounts to a rather vague bragging right. This can't be called an "entertainer's house" as the Secret Service bars the street to non-residents. (Yes, that's even with the Obamas in Washington.) Sellers Bill and Jackie Grimshaw were urban pioneers who bought a down-at-heel mansion in a gritty neighborhood. Now the area has gentrified, and like most people in that position, the Grimshaws live a bit more modestly than the pool of likely buyers. (“I didn’t lavish attention on the house,” Professor Grimshaw admits. Mocking an outraged, imaginary potential buyer, he said: “Where’s the granite? How can people live like this?”) By current Hyde Park standards, it's a fixer-upper.
Evidently the listing agent chose not to have an asking price out of fear it would be too low (cheating the seller) or too high (scaring off buyers). There is considerable evidence that it would be wiser to set a high price and be willing to come down. The list price is an "anchor" that exerts a powerful influence on estimations of value. In a 1987 paper, Gregory Northcraft and Margaret Neale, then at the University of Arizona, studied the effect of listing prices on perceptions of real estate values in Tucson. The effect was huge: even practicing real estate agents could be swayed 14 percent in their estimations of fair market value. For regular folks, the effect was twice that. That's an advantage no home seller should ever willingly cede.

Zillow estimates the value of the Grimshaw house (5040 S. Greenwood Avenue, centered in the aerial view above) at $1,837,000. It also appears to confirm a substantial Obama premium. This Zillow chart traces the house's estimated value over the last year, compared to average values for the 60615 zip code and Chicago. Not surprisingly, Chicago values are down 10 percent over the past year. But Hyde Park's zip code is flat, and the Grimshaw house is up a hefty 38 percent.

Zillow's pricing formula doesn't factor in an Obama premium, not directly. And the estimates for the Grimshaw house actually dipped after the election. That may reflect the time lag for nearby houses to go on the market and close escrow at prices reflecting the Obama premium. If accurate, the Zillow figures imply the Grimshaws are up about half a million, thanks to the neighbors.

Northcraft, Gregory B., and Margaret A. Neale (1987). “Experts, Amateurs, and Real Estate: An Anchoring-and-Adjustment Perspective on Property Pricing Decisions.” Organizational Behavior and Human Decision Processes 84, 87-93.