Class 5: Neighborhood Change PAI786: Urban Policy Class 5: Neighborhood Change

Urban Policy: Neighborhood Change Class Outline Neighborhood change Increase in low-income residents Gentrification Outmigration The ripple effects of neighborhood change Long-term urban trends

Urban Policy: Neighborhood Change Housing Bids and Neighborhood Change The tools we have developed help us to understand neighborhood change. The key is to recognize that changes in population or income shift bid functions up or down. If people move into an area, for example, competition for housing intensifies and bid functions are pushed upward. This leads, in turn, to declines in housing unit size or quality.

Urban Policy: Neighborhood Change Increase in Low-Income Residents Suppose that an urban area experiences a large increase in the number of low-income residents (due to immigration or job losses). Then the bid function for low-income households will shift upward. The low-income section of town will expand; housing units there will be converted. Low-income households will consume less H and pay more per unit of H.

Urban Policy: Neighborhood Change These neighborhoods shift from high-to low-income

Urban Policy: Neighborhood Change Downward Housing Conversion This housing conversion can take many forms Dividing large units into smaller units Renting previously single-household units to more than one household (or to larger households). Allowing units to decline in quality.

Urban Policy: Neighborhood Change Type A Neighborhood Decline: Drop in Housing Quality In some cases, this process leads to clear neighborhood decline due to: Severe overcrowding and/or Extensive housing deterioration—to bring quality- adjusted square feet, H, down to a level that the entering low-income people can afford.

Urban Policy: Neighborhood Change Outmigration Sometimes economic or social changes pull people out of a city. Low-income jobs move to another region. Housing subsidies or new highways pull middle- income households to the suburbs. This leads to another type of decline:

Urban Policy: Neighborhood Change Type B Neighborhood Decline: Emptying Out As P, the price per unit of H, declines, landlords have less incentive to maintain their units and housing quality (H) deteriorates. If high-income households cannot be convinced to move in, some neighborhoods will experience vacancies and abandonment—which have a strong negative impact on neighborhood quality. We will return to these topics in the next few classes.

Urban Policy: Neighborhood Change Gentrification Neighborhood change can also involve higher- income households moving into previously low- income areas. This is called gentrification. Now conversion involves improving units. People must expect neighborhood amenities to improve.

Urban Policy: Neighborhood Change Gentrification These locations change from low- to high-income

Urban Policy: Neighborhood Change The Role of Expectations The role of expectations is worth emphasizing. Housing is a long-lived asset. Home buyers bid on housing based on their long-term expectations concerning neighborhood quality. High-income people will not move into a poor neighborhood if they do not expect its amenities to improve.

Urban Policy: Neighborhood Change The Role of Expectations, Continued Many local policy makers have figured this out. Programs providing moderate-income housing in poor neighborhoods are likely to fail Unless the city is committed to improving the neighborhood. And moderate-income households believe the city will succeed.

Urban Policy: Neighborhood Change Gentrification and Displacement One great dilemma of local housing policy is the trade-off between gentrification and displacement. Cities want better housing and nicer neighborhoods. Existing low-income renters may be pushed out as a neighborhood improves and rents go up. Existing low-income homeowners benefit from gentrification because the value of their homes goes up, although they might lose social ties with renters.

Urban Policy: Neighborhood Change Trends in Gentrification A recent study in Governing (Feb. 2015) looked at all “eligible” tracts, defined as tracts in the bottom 40% of tracts in a MSA in both income and property value. “Gentrifying” tracts had increases in both measures in the top third for their area. From 1990-2000, 8.6% of these tracts gentrified. From 2000-2010, 20.0% gentrified.

Urban Policy: Neighborhood Change Gentrification and Crime One possible explanation for this increase in gentrification is the large drop in violent crime in the U.S., including in large cities. Safety is a key amenity. The sorting process puts low-income households in places where neighborhood amenities are low. So high crime in cities keeps higher-income people out of some cities; a drop in crime brings them back.

Urban Policy: Neighborhood Change The violent crime rate has dropped significantly in recent years in the U.S. , including in large cities.

Urban Policy: Neighborhood Change Crime and Property Values Several studies find that people are willing to pay a lot to avoid a high-crime location, which is a necessary condition for crime to affect income sorting. In my recent study of the Cleveland area, Compared to houses in neighborhoods with low property and violent crime, houses in CBGs with high property and violent crime sold for 7.7% less. Moreover, houses sell for a 20% discount if they are within one-half mile of a crime “hotspot” and for a 9% discount even if they are 2 miles away. So lower crime may lead to re-sorting and bring higher- income people back into the city.

Urban Policy: Neighborhood Change The Ripple Effects of Neighborhood Change Change in one neighborhood often has ripple effects in other neighborhoods. If gentrification occurs in some neighborhoods, for example, low-income households may no longer have enough room. This may lead to neighborhood change elsewhere as low-income people move in. A complete analysis of gentrification—or any other type of neighborhood change—must consider these ripple effects.

Urban Policy: Neighborhood Change Evidence on Neighborhood Change from Ellen/O’Regan (RSUE, 2011) Ellen and O’Regan studied these ripple effects for “gaining” low-income neighborhoods in the U.S. in the 1990s. Gaining neighborhoods are those in which average incomes grew. E/O put together a unique data set that could track people within neighborhoods. Their key question was: Did economic growth lead to displacement?

Urban Policy: Neighborhood Change Findings of Ellen/O’Regan There is no evidence of heightened exit rates for renters or for poor households—i.e., no displacement! Selective entry and exit among homeowners (e.g. richer owners moving in) are key drivers of neighborhood change. Incumbents had larger income increases in gaining than in other neighborhoods. Neighborhood satisfaction increased a little more in gaining than in other neighborhoods. Populations in gaining neighborhoods did not became more white in the course of change.

Urban Policy: Neighborhood Change Long-Term Urban Trends Two key long-term urban trends are Declines in transportation costs, t Increases in income, which lead to increases in H. These long-term trends obviously flatten the slope (-t/H) of bid functions.

Urban Policy: Neighborhood Change The Impact of Long-Term Trends Slope flattens as t/H declines. And bid function shifts downward to keep population constant.

Urban Policy: Neighborhood Change The Impact of Long-Term Trends This picture leads to three clear predictions: Density will decline in central cities Density will increase in suburbs The physical size of urban areas will grow These predictions are supported by evidence from many countries.