In valuation models, the depreciation of housing is represented by age. Housing age captures value loss over time, demonstrating that as the age of the building increases, its physical and functional attributes erode. Renovation offsets depreciation by recovering housing capital and increasing equity. Renovation creates a contemporary appeal of aesthetic and wealth; thus the original house age overestimates its capital attrition. Consequently, an effective age is a better representation of depreciation in valuation models. Effective age accounts for abnormal changes in the condition of the house that alter its remaining economic life. However, a standardized effective age model supported by empirical research has not been developed in the assessment community. Using sale prices of renovated houses in Harris County, Texas, this paper outlines a procedure for developing effective age models. The theoretical framework of the model is predicated on indexing. Building index is used to calibrate depreciation, and its trending creates an effective age. A conversion model replaces the county’s renovation indexes with effective age and produces results within the acceptance level of the assessment industry standard. The model limits the prediction of effective age to two variables: housing age and remodel age.
Depreciation; Replacement cost approach to value
Williams, E. (2019). Using effective age to determine capital recovery in the housing market. Journal of Property Tax Assessment & Administration, 16(1), 25-41. Retrieved from https://researchexchange.iaao.org/jptaa/vol16/iss1/2