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December 04, 2007

Rent gradients and real estate

An economic concept called the "rent gradient" relates housing prices to distance. N.C. State University economist Dr. Mike Walden explains. Listen

"I think anyone who is in the real estate market - let's say as a buyer, they are looking to buy a home or actually looking to rent - will quickly find out that there is a relationship between the price you are going to pay per square foot, either in buying a house or renting, and how far you are away from things that people want to be close to," says Walden, North Carolina Cooperative Extension economist and professor of agricultural and resource economics. "And the relationship is that the farther away you are from centers of economic activity - cultural centers, employment centers - the lower the price per square foot is going to be. The reason for that, of course, is that a benefit of being close to employment centers, for example, is people save time and money in commuting. Those savings, however, are going to be reflected in the fact that the value of that house or apartment is going to be higher. So you are going to pay for, in essence, that proximity through higher rents and higher housing prices.

"Conversely, if you live farther out in a rural area, and you have a longer commute, you don't have that proximity advantage. And so your price for your real estate is going to be lower. And so people always in the real estate market face this trade off. Do they live closer in and save on commuting costs and yet they are going to have to pay higher housing costs? Or do they live farther out, where they can afford to buy a bigger house more square footage, yet their commuting costs are going to be much higher?"

Posted by Dave at December 4, 2007 08:00 AM