Walkability and the Risk of Mortgage Default

A recent study from University of Arizona professor Gary Pivo and strengthens the economic case for walkable communities. Pivo looked at the relationship between mortgage default and walk scores for multifamily housing. He found a strong inverse relationship: low walk scores were associated with high risk of mortgage default, and high walk scores were associated with low risk of mortgage default. The relationship was strongest at the extremes:

“Where walk score was 80 or more (out of 100), the relative risk of default is 60 percent lower than where walk score is less than 80. Where walk score is 8 or less, default risk is 121 percent higher.”

These findings turn common beliefs upside down, showing that the most walkable developments are not, in fact, risky propositions. In general, in the past, it has been more difficult to finance projects in walkable areas. There are many reasons for this, but it boils down to a perception of risk on the part of lenders.

For example, the mixed-use nature of the walkable neighborhoods—with both commercial and residential space in close proximity, sometimes housed in a single building—is considered more complex for developers, financiers and investors. This complexity leads to the perception of risk, although Pivo notes, it is “unclear exactly what it is about the projects that are cause for concern.”

Furthermore, demand for housing in walkable areas appears to be on the rise. Pivo cites a study from the Urban Land Institute which found that “demand and interest in apartments in ‘American infill’ locations remain hot.” Community preference surveys from the National Association of Realtors indicate increased demand for mixed use neighborhoods, transportation choices, and short commutes. The Sonoran Institute's  RESET study looked at six communities in the Rocky Mountain West, and found in most cases that people are willing to pay a premium for housing in compact, walkable neighborhoods.

So, research indicates that walkable housing is a lower-risk investment—there is consumer demand, and low likelihood of mortgage default. Walkability has also been shown to have multiple other advantages, like improved public health, reduced carbon footprint, and less pollution.

To promote walkable development, Pivo recommends that lenders offer better terms for mortgages on walkable properties. Developers consistently cite difficulty in securing financing as one of the biggest barriers to the success of mixed use and other walkable developments. It’s time to remove that barrier, and recognize the investment opportunity that awaits in these great neighborhoods.