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 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 , 8.6% of these tracts gentrified. ▫From , 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.