National Housing Cycles, Borrowing Costs, and Gentrification

Abstract

This paper documents that national housing market expansions have been associated with accelerating gentrification. Specifically, property values and the share of educated residents increased more in downtown locations than in suburbs during periods of national-housing-market expansions. This difference-in-differences holds conditional on changes in local income. A range of additional empirical tests suggest that the direct effect of lower borrowing costs, rather than indirect effects operating through income expansion, is responsible for accelerating gentrification. To interpret this evidence, I present a model in which a reduction in borrowing costs causes a decline in the cost of living in land-constrained areas for high-income households (relative to the cost for low-income households). An extended version of the model yields predictions for changes in home values and bachelors shares across MSAs that are supported by the data.

Keywords: Housing Cycles, Credit Supply, Gentrification, Inequality

JEL Classification: E50, R30