Do people make uneconomic home improvements? In this era of booming home improvement, the question is often asked. Real estate columnists often compare the costs of a home improvement (such as adding a bath) to some datum on how the market values such an addition. A hedonic analysis was done in 2003 by G. Stacy Sirmans and David A. Macpherson and received substantial coverage. It seems that home improvers do all sorts of over- (and under) investing.
A recently published paper by Virginia Tech's Robert E. Lang (in Vol 1, No. 1 of Opolis) argues that, "features that add to a property's 'urban intensity' can lower the sales price of single-family detached suburban homes." Lang also notes that homeowners' associations have all sorts of rules to prevent owners from making these sorts of additions.
Interesting. It is quite reasonable that homeowners demand rules that sustain neighborhood quality (as Bill Fishel and Bob Nelson have been arguing for years). Lang adds that they are also buying into rules that (a la Tom Schelling?) help them to protect themselves from themselves.