Two Virginia Tech studies find that housing prices fall after real estate disclosures

Real estate laws that require sellers and their agents to provide prospective homebuyers with basic information about a neighborhood, such as whether it is in a flood zone or an airport noise zone, decrease housing prices by thousands of dollars, according to two new studies from Virginia Tech.

Jaren Pope, assistant professor of agricultural and applied economics in the College of Agriculture and Life Sciences, examined a local disclosure ordinance in Raleigh, N.C., involving airport noise and a North Carolina state law involving flood zones. The airport noise study will be published in a forthcoming issue of the Journal of Urban Economics, and the flood zone study in an upcoming issue of Land Economics.

“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 Virginia, state law requires real estate agents either to disclose basic information about a home, such as structural damage, or provide potential buyers a disclaimer that they are not offering this information. Some, but not all, localities in Virginia have ordinances that require disclosures that surpass the commonwealth’s requirements.

“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.”

Nationally ranked among the top research institutions of its kind, Virginia Tech’s College of Agriculture and Life Sciences focuses on the science and business of living systems through learning, discovery, and engagement. The college’s comprehensive curriculum gives more than 2,200 students in a dozen academic departments a balanced education that ranges from food and fiber production to economics to human health. Students learn from the world’s leading agricultural scientists, who bring the latest science and technology into the classroom.