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In Real Estate, the Truth Can Reduce Home Values

Study confirms that full disclosure can cost the seller

October 18, 2007

Jaren Pope, assistant professor of agricultural and applied economics at Virginia Tech, examined a local disclosure ordinance in Raleigh, N.C., involving airport noise and a North Carolina state law involving flood zones.

“Homes near the Raleigh-Durham International Airport already sold for a price that was 4 percent lower than comparable homes in Raleigh, but a year after the city mandated a disclosure about airport noise, these prices dropped an additional 3 percent,” Pope said.

Likewise, there was no substantial price difference between comparable homes in North Carolina that were in a flood zone and those that were not – that is, until the state legislature required homeowners to disclose this information. After the law passed, houses in flood zones lost an average 4 percent in market value.

“Both of these studies examined housing prices a year before the disclosure law went into effect and a year after, controlling for other factors in the housing market that might affect prices,” Pope said.

He added that as the housing market continues to slow down and becomes a buyer’s market, disclosure laws might have more of an impact on housing prices.

Over the past few years, states across the U.S. have established new disclosure laws to ensure that prospective homebuyers are fully informed. These laws not only vary from state to state but also from county to county in some cases.

“In economics, we often assume that buyers and sellers are fully informed in every transaction they make, but my research suggests that this is not always true in the world of real estate,” Pope said.

Despite his findings, Pope does not believe that disclosure laws are detrimental to the housing market.

“The market is more efficient when buyers and sellers are informed before they make a decision,” Pope said. “Being near an airport or in a flood zone might not be a major concern for some homeowners, but for others it might be a big deal. Disclosure laws help to ensure that buyers choose homes that better match their preferences.”

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