Endogenous Gentrification and Housing-Price Dynamics
University of Chicago - Booth School of Business
Daniel A. Hartley
Federal Reserve Banks - Federal Reserve Bank of Cleveland
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
February 1, 2012
FRB of Cleveland Working Paper No. 10-08R
In this paper, we begin by documenting substantial variation in house price growth across neighborhoods within a city during citywide housing price booms. We then present a model which links house price movements across neighborhoods within a city and the gentrification of those neighborhoods in response to a citywide housing demand shock. A key ingredient in our model is a positive neighborhood externality: Individuals like to live next to richer neighbors. This generates an equilibrium where households segregate based upon their income. In response to a citywide demand shock, higher-income residents will choose to expand their housing by migrating into the poorer neighborhoods that directly abut the initial richer neighborhoods. The in-migration of the richer residents into these border neighborhoods will bid up prices in those neighborhoods, causing the original poorer residents to migrate out. We refer to this process as “endogenous gentrification.” Using a variety of data sets and using Bartik variation across cities to identify city-level housing demand shocks, we find strong empirical support for the model’s predictions.
Number of Pages in PDF File: 58
Keywords: gentrification, housing price dynamics, housing consumption
JEL Classification: R12, R21, I32working papers series
Date posted: August 11, 2010 ; Last revised: April 30, 2013
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