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Stigmatized Properties: Does the Market Have a Memory?

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By : Kris Guidry    99 or more times read
Stigma is an adverse public perception about a property that results in the diminution of value. Properties where a murder or suicide occurred, as well as those located near Superfund cleanup sites and electromagnetic fields (EMFs) are all considered "stigmatized". The following are some alternative, sometimes overlapping, stigma classifications:

Physical or Psychological Stigma/Fact or Feelings

Physical stigma relates to a tangible physical defect associated with a property. Examples include termite infestation, groundwater contamination, EMFs, asbestos and landfills. Properties suffering damage due to floods, earthquakes, hurricanes, and the like would also fit into this category. In these cases, there is no question regarding the existence of certain events in a property's history. These are pure statements of fact.

Psychological stigma is when there are no physical or environmental defects and the property is suffering from a bad reputation due to a previous event. Properties where a murder or suicide occurred; a house purported to be haunted by ghosts; a previous occupant was infected with AIDS/HIV are examples. The property may be in perfect condition, but is suffering from the "yuck" factor. Any resulting ramifications can be traced to fear and uncertainty. Therefore, properties are often stigmatized due to public perception (even if scientific evidence is lacking).

Indigenous Stigma or Negative Externalities

The stigma may be indigenous to the property, i.e., the defect occurred or is contained within the property's legal boundaries. The condominium where Nicole Brown Simpson was murdered or any of the Superfund cleanup sites are prime examples of this concept.

A negative externality (or diseconomy) is caused by undesirable influences outside of the site's boundaries. Properties subject to negative externalities are adjacent to or in close proximity to the property bearing the burden of the indigenous stigma, but they, too, are affected by the stigma. For instance, residential homes located in a neighborhood where a registered child molester lives or homes in Love Canal, New York (site of a toxic waste landfill) are affected by negative externalities. Groundwater contamination, for example, moves without respect for property boundaries and can affect multiple properties simultaneously.

Stigma and Time: Temporary or Permanent Stigma

Stigma is thought to have an associated time element which can be broken down into two parts: temporary and permanent.

Temporary stigma is one which eventually dissipates and the property resumes its position in the market. However, how is temporary defined? Is it one year? Five years? Fifty years? It has been suggested that "time heals all wounds" - most properties recover from stigma and the market eradicates any memory of the event. However, the length of time necessary is controversial. The home where actress Sharon Tate was murdered by members of the Manson family sold at its full market value, but only after the passage of 20 years after the killing, and the original house was demolished and a new improvement was constructed.

Permanent stigma is a more vexing problem. It involves stigma that remains long after the problem is removed. It may involve inertia. Inertia (or path dependence) occurs when stigma changes the composition of the neighborhood. For instance, an event may lead to the exodus of high income residents from an area, making property more affordable to lower income residents. An extreme form of permanent stigma is that related to a catastrophic occurrence, where the property does not return to its former use. An event such as the bombing of the Murrow Building in Oklahoma City would fall into this category. Rather than rebuild at the original site, a memorial to the victims was erected; a new Federal building was constructed elsewhere.

Probability of Occurrence

Another element associated with stigma relates to probability of occurrence: is the stigma associated with an event that is considered to be a once in a lifetime event? Is there little likelihood that such occurrence would happen again at the same site? For example, there is an infinitesimal probability that a mass suicide would again occur at the "Heaven's Gate" mansion. On the other hand, is there a continuous risk of the property being stigmatized again? In industrial corridors, properties face the risk of re-contamination. Other examples include the following: properties in high-crime areas, coastal properties prone to flooding and properties along an earthquake fault line.
Kris Guidry, Ph.D. is a real estate educator with 20+ years of experience. She is faculty member at Nicholls State University, Thibodaux, LA.

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