Are home prices appreciating more or less in black neighborhoods? Is that a good thing?

Today, in part 2 of our analysis of the home price gap between majority black and predominantly white neighborhoods we look at the pattern of home price appreciation for black and white home buyers. Yesterday, in part 1 of our series, we looked at a Brookings Institution report showing that homes in majority black neighborhoods sold at a 20 percent discount to otherwise similar homes in otherwise comparable neighborhoods. This systematic undervaluation of housing in majority black neighborhoods works out to a national value disparity of more than $150 billion. We took a close look at how this plays out in Memphis, a metro area with a large American population.

Housing appreciation and cyclical variability

A key question the Brooking’s report leaves unanswered is whether the black/white housing differential is larger or smaller than it was 10 or 20 years ago.  If it was larger in the past and is smaller today, that implies that homes in majority black neighborhoods, although still undervalued relative to homes in predominantly white neighborhoods, have enjoyed greater relative appreciation. From the standpoint of wealth creation, the amount of appreciation since you bought your home is likely to matter more than whether the current price of your house is more or less than otherwise similar properties. Another way of expressing this is that homeowners in black neighborhoods had a lower purchase price (or basis) in their home, and even though it is still undervalued, it may have gained more value in percentage terms than homes in non-majority black neighborhoods.

Indeed, Dan Immergluck and his colleagues at the Georgia State University found that for those who bought homes in 2012, price appreciation for black homebuyers from 2012 through 2017 was higher than for white homebuyers.  Immergluck’s data show that in most markets, homes bought by black buyers appreciated more than homes bought by white homebuyers.

Immergluck’s study looks at appreciation rates for black homebuyers compared to white homebuyers, rather than in majority black neighborhoods compared to predominantly white neighborhoods.  As Immergluck reports, nationally, a majority of black homebuyers bought homes in neighborhoods that were not majority black. Home prices appreciated more for black buyers in strong market cities (Boston, California) and least in weaker market cities (St. Louis, Birmingham).

There are noticeable variations in home appreciation by race over the course of the business cycle:  Zillow’s Skylar Olsen, in her report “A House Divided” plotted the change in home values by the predominant racial/ethnic group in each zip code.  Her results show greater volatility for home prices in black plurality neighborhoods.  Her data show home values in plurality black neighborhoods (the green line) and plurality non-Hispanic white neighborhoods (the blue line).  Houses in black neighborhoods declined more in value from 2007 to 20012 ( the housing bust) than did homes in white neighborhoods.

Another recent report, written by Michela Zonta for  the Center for American Progress finds that home values in neighborhoods where black homebuyers purchased homes had lower appreciation rates than neighborhoods where white homebuyers purchased homes. But Zonta’s study uses appreciation rates from 2006 through 2017, and looks at home purchases in 2013 through 2017, so doesn’t reflect the actual return enjoyed by current buyers.  It’s likely that the opposite results reported by Immergluck and Zonta reflect the greater volatility of home prices in predominantly black neighborhoods (with bigger percentage declines in the bust, and bigger percentage gains the the recovery).  Immergluck looks just at the recovery and finds faster appreciation in black neighborhoods, Zonta looks at the whole cycle and finds lower overall appreciation in black neighborhoods.

There’s other evidence of this cyclicality, Zillow’s data show a similar pattern for foreclosed homes, with greater volatility in neighborhoods of color. In the past five years, home values for foreclosed homes in black neighborhoods have rebounded more sharply (doubling in value) than home values for foreclosed homes in white neighborhoods.  Foreclosed homes in black neighborhoods rose in price 110 percent compared to a 70 percent increase in the value of foreclosed homes in white neighborhoods.

There’s also evidence of variations in cyclicality by price tier of the market.  Lower priced housing tends to have greater price volatility than higher priced housing. Some of the faster growth of lower priced housing in the past few years may simply reflect that cyclical pattern and especially greater price volatility for homes in lower price tiers. According to data from the Federal Housing Finance Agency, since 2012, housing prices for lowest tier of the housing market have increased more rapidly than high tier housing. Nationally, between 2012 and 2017, homes in the low priced tier increased by about 40 percent while homes in the highest priced tier increased by about 20 percent.

If Black and Latino households are buying primarily in the lower priced tiers and white households are buying primarily in the higher priced tiers, then this may account for the difference in appreciation observed in Immergluck’s statistics..

Un-answered questions and what’s next

There’s little question that homes in black neighborhoods are systematically devalued compared to otherwise similar homes in white neighborhoods. The resulting devaluation means that homeowners in black neighborhoods have accumulated less wealth than they might have otherwise, but also somewhat paradoxically means that housing in these neighborhoods is more affordable, especially for renters. The causes of this devaluation are deep-seated and slowly changing. The fact that homebuyers, both black and white, have apparently recognized the size and persistence of this value (and appreciation) difference likely prompts investment decisions that only reinforce its existence.

In theory, we should expect the low price of equivalent quality homes in predominantly black neighborhoods to attract buyers, whether they be value-seeking white buyers who are indifferent too or actively seek out neighborhoods of color, or black households. But as Jason Segedy has pointed out, low prices may be an marker of stigma, decline or low expectations, and produce a dynamic that makes it hard to attract new buyers.

What to do about this problem is an equally complicated problem.  Rising home values in predominantly black neighborhoods would represent a gain in wealth for incumbent homeowners, but would also imply at least a nominal decline in affordability. This reflects the deep-seated contradiction between our two goals for housing policy: we want housing both to be a great investment, and to be affordable. Debates over housing value disparities will always confront this obstacle.

The new Philadelphia Fed study of gentrification is the best evidence yet that gentrification creates opportunity and promotes integration

To many “gentrification” is intrinsically negative. When wealthier, whiter people move into the neighborhood, it must necessarily mean that lower income people of color are either driven away (to even worse neighborhoods) or suffer from higher rents and loss of community if they stay.

A new study from Quentin Brummet of the University of Chicago and  and Davin Reed of the Philadelphia Federal Reserve Bank, is the best evidence yet that this view of gentrification is fundamentally wrong.  Gentrification creates substantial benefits for long time residents of low income neighborhoods, and causes little displacement. The study shows:

• There are very small differences in out-migration rates between gentrifying neighborhoods and otherwise similar neighborhoods that don’t gentrify. Over ten years, we would expect about 60 percent of less educated renters to move out of non-gentrifying low income neighborhoods, compared to about 66 percent of less educated renters in gentrifying neighborhoods.
• Those who leave gentrifying neighborhoods do not end up moving to destination neighborhoods that are measurably worse than the destination neighborhoods of households moving out of poor but not gentrifying neighborhoods
• The demographic composition of gentrifying neighborhoods, post-gentrification, remains highly mixed, with many less educated renters and homeowners
• Less educated renters that remain in gentrifying neighborhood don’t see significant increases in rents:  There’s no appreciable difference in rent increases between less educated living in gentrifying and non-gentrifying neighborhoods
• Demographic changes in gentrifying neighborhoods are those that are generally associated with better outcomes for low income children growing up in these neighborhoods.
• Poor neighborhoods that don’t gentrify, don’t state the same, they decline:  non-gentrifying neighborhoods lose population and experience declining incomes.
• Many existing studies of gentrifying neighborhoods that don’t account for high levels of migration even in non-gentrifying neighborhoods, that don’t disaggregate effects by socioeconomic status, and that rely primarily on median rent statistics can produce misleading pictures of neighborhood change.

The Brummet and Reed study focuses on the 100 largest US metro areas, and measures change key neighborhood characteristics between 2000 and 2010-14, using Census data. An important innovation of their work is linking data for individuals across the two time periods, to measure in detail what happened to a neighborhood’s original residents. The study uses a definition based on changes in the relative educational attainment of adults in Census tracts; gentrifying neighborhoods are the low income census tracts in central cities of the nation’s 100 largest metro areas that recorded the highest rates of increase in adult educational attainment over the past decade or so.  They use educational attainment as their key metric for sorting households by socioeconomic status, comparing results for more-educated (college and higher) and less educated households.

Displacement is negligible

The most common critique of gentrification is the notion that it forces long-term residents, especially low income renters, out of the neighborhood. Brummet and Reed stratify households by education level (which is a good proxy for income levels).  They find that gentrification has a very small impact on the tendency of less educated renter households to move away from the neighborhood.  Over a ten-year period, about 60 percent of less educated renters moved out of their neighborhood, regardless of whether it gentrified.  The author’s estimate that for gentrifying neighborhoods, for less educated renter households, the rate is about 6 percentage points higher (66 percent vs 60 percent) over the period of a decade.

Another common concern about those who migrate out of gentrifying neighborhoods is that somehow they are forced to live in locations that are measurably worse than the gentrifying neighborhood they left. Brummet and Reed compare the characteristics of the destination neighborhoods of those who left gentrifying and non-gentrifying tracts, and found no significant differences:

. . . for all types of individuals, movers from gentrifying neighborhoods do not experience worse changes in observable outcomes than movers from non-gentrifying neighborhoods. That is, they are not more likely to end up in a higher poverty neighborhood, to become unemployed, or to commute farther than individuals moving from non-gentrifying neighborhoods

To the extent that there is demographic change in gentrifying neighborhoods, it is a product of the different characteristics of people who move in to a neighborhood, and not due to an increase in the number of people who move out.

Exposure to poverty declines

The benefit of gentrification is that these more mixed income neighborhoods lower the exposure to poverty for all residents.  Brummet and Reed estimate the average poverty rate of neighborhoods that gentrified declined by 3 percentage points.  As a wide body of research has shown, the poverty rate of one’s neighborhoods tends to aggravate all of the negative effects of poverty, so reductions in poverty improve living conditions and opportunity for residents who remain. The key question is whether many long-term residents of these neighborhoods are able to remain and enjoy these benefits.

The archetypal description of gentrification, from Ruth Glass, who coined the term in the 1960s, is that persons from an upper class totally replace the original lower class residents of a neighborhood. Brummet and Reed show that even in the most gentrified neighborhoods, the amount of demographic change over a decade and a half is relatively small, and gentrified neighborhoods have a high degree of income diversity, with 30 to 60 percent of long term residents remaining, post-gentrification (about the same amount as in non-gentrifying neighobrhoods).  They conclude:

. . . less-educated renters and less-educated homeowners each make up close to 25 percent of the population in gentrifiable neighborhoods, and 30 percent and 60 percent, respectively, stay even in gentrifying neighborhoods. Thus, the benefits experienced by these groups are quantitatively large . . .

Rents for less educated are unaffected by gentrification

After displacement, perhaps the second most commonly cited harm of gentrification is the notion that long term residents are forced to pay higher rents. Brummet and Reed look at the actual levels of rents paid by less educated residents both pre- and post-gentrification.  Contrary to the received wisdom on the topic, they find that rents did not increase for less-educated long-term residents:

. . . somewhat surprisingly, gentrification has no effect on reported monthly rents paid by original resident less-educated renters.

The reason likely has to do with the variation in rental unit size and quality within gentrified neighborhoods.  If many housing units remain smaller, with fewer amenities, less favorably located, they may rent for lesser amounts.  It’s fully possible for median rents to increase in a neighborhood, and for the rents for some other segment of less desirable housing to not increase, or not increase as much. As we’ve noted at City Observatory, it may be more appropriate to look at the 25th percentile of rents to judge affordability for lower income households.  As Brummet and Reed conclude:

These results caution against using simple neighborhood median rents when studying gentrification, as is almost always done. Changes in median rents can miss important segmentation and heterogeneity, leading to incorrect conclusions about how the housing costs paid by different types of households are actually affected.

The dynamics of neighborhood change

Implicitly, much of the discussion of gentrification takes a highly static view of neighborhoods.  It assumes, that somehow, in the absence of gentrification, and neighborhood will somehow stay just as it is.  As Brummet and Reed show, all neighborhoods, including both gentrifying and non-gentrifying lower income neighborhoods, experience substantial turnover in population over the course of a decade or so.

Neighborhoods are always changing, and the low income neighborhoods that don’t gentrify don’t somehow stay the same:  they lose population, and experience declines in income.  The average low income neighborhood that didn’t gentrify between 2000 and 2012 lost 8 percent of its population, and saw a decline in average incomes of 21 percent (Tables 4 and A5). Also:  change in gentrifying neighborhoods is not a zero sum game, with each new resident replacing, one-for-one, a previous resident:  Gentrifying neighborhoods saw their total population increase 21 percent.  These results parallel closely the findings from City Observatory’s own Lost in Place study of neighborhood change from 1970 to 2010 that showed that high poverty neighborhoods that didn’t gentrify lost 40 percent of their population over four decades, while gentrifying neighborhoods recorded increases in population.  This underscores why adding new housing in gentrifying neighborhoods can be an important ingredient in assuring they remain diverse and equitable.

Are these results really surprising?

While the Detroit Free Press labeled these results “surprising”, — “Study reveals surprising results about Detroit gentrification,” — they actually fit the pattern of a growing body of careful studies of neighborhood change.  Martin and Beck found that there was almost no difference in out-migration between gentrifying and non-gentrifying poor neighborhoods.  Ingrid Gould Ellen and her colleagues, using data on kids born to families receiving Medicaid benefits showed virtually no displacement due to gentrification, and also showed that residents who moved generally relocated to similar neighborhoods. Lance Freeman‘s work has shown that displacement rare, Jacob Vigdor has shown that long-time residents are somewhat more likely to stay in gentrifying neighborhoods than non-gentrifying ones.

There’s a decided “man-bites-dog” character to media reporting on this paper.  The Detroit Free Press summarizes the findings as “challenging the notion than gentrification is as harmful as many believe.” The Philadelphia Inquirer headlined its story, “Effects of gentrification on long time residents are not as negative as typically perceived, Philly Fed study says.” CityLab talks about the “Hidden Winners” from gentrification; apparently, gentrification is so widely known to be A BAD THING, that it’s counter-intuitive to think that existing residents might benefit. For example, Kriston Capps of CityLab writes:

Often it goes without saying that the drawbacks of neighborhood change—above all the displacement of existing lower-income residents, but also increases in rents and upticks in cultural conflicts—greatly outweigh any benefits.

It is probably too much to ask, but what the data show, is that for many residents and neighborhoods, gentrification is a good thing.  It raises property values for long-time homeowners, increasing their wealth. It doesn’t appear to be associated with rent increases for less educated renters who remain. Poverty rates decline, and objective changes in neighborhood characteristics–notably greater income mixing–are associated with higher levels of inter-generational mobility for kids growing up in such neighborhoods.  In addition, the data show that poor neighborhoods that don’t gentrify steadily deteriorate on these measures. Implicit in much of the popular discussion and press coverage of gentrification is the assumption that neighborhoods that don’t gentrify will stay the same–but they don’t.  Things get worse.  That’s the relevant story for many places, and its simply not reported.

Methodology and definitions

What makes this study special is that it tracks residents over time as they move in and out of different neighborhoods. The bugbear of most displacement studies is that they rely on comparing one-time snapshots of neighborhood composition, and don’t track individuals.  There’s also an implicit assumption in much work in the field that any time someone moves out of a neighborhood that’s evidence of displacement.  But as Brummet and Reed painstakingly illustrate, population dynamics in urban neighborhoods are far more dynamic that usually thought. As we’ve noted at City Observatory, the average tenure for renters in the US is less than two years. With their longitudinal tracking of individual households, Brummet and Reed estimate that about three-fifths to three -quarters of all renters and a third to forty percent percent of all homeowners will move away from their low income neighborhood over a-ten year period (Table 1). Failing to control for this background of steady change biases many gentrification studies.

Brummet and Reed use confidential and anonymized census data from 2000 and the 2014 American Community Survey to track the residential location of individuals over time. This connected, longitudinal data series is a gold standard of measuring neighborhood change. Snapshot comparison studies can’t tell whether a decline in the number of households with incomes below the poverty line is due to such households enjoying higher incomes, are is due to lower income households moving out of the neighborhood.

One critical ingredient in any study of neighborhood change is the definition of gentrification. Brummet and Reed develop two measures:  one is a continuous measure of demographic change that examines the degree to which a neighborhood gentrifies, the second is a more commonly used-binary measure that divides all lower income, central city neighborhoods into two categories, gentrifying and non-gentrifying, based on whether they are in the top 10 percent of such neighborhoods nationally on this index.

Policy Implications: Leverage gentrification for good

Change of all kinds is hard, and for residents of low income communities, there’s a long and sad history of most changes, many of them promised to make things better, only making things worse.  So its little surprise that their should be skepticism about gentrification.  But unfortunately, the knee-jerk reaction to the perception of negative effects from gentrification has generally been a series of policies that promise to only make the problem worse:  rent control, NIMBY development restrictions, and inclusionary housing requirements. As Brummet and Reed write:

. . . concern that gentrification displaces or otherwise harms original neighborhood residents has featured prominently in the rise of urban NIMBYism and the return of rent control as a major policy option.

The fact that gentrification is mostly benign, and in many respects beneficial to long-term residents should change the policy calculus.  Rather than blocking growth and development in gentrifying neighborhoods, cities should recognize that gentrification creates benefits and also leverage this investment to provide more opportunities for less-well off households to live in great urban neighborhoods  

This could provide new options for policies designed to increase children’s exposure to high-opportunity neighborhoods, for example by targeting subsidies to help them stay in neighborhoods that are improving around them.  . . . Accommodating rising demand for central urban neighborhoods, such as through building more housing, could maximize the integrative benefits we find, minimize the out-migration effects we find, minimize gentrification pressures in nearby neighborhoods, and minimize

As we’ve argued at City Observatory, using tax increment financing to subsidize affordable housing in neighborhoods experiencing rapid change.  Tapping the property appreciation in gentrifying neighborhoods leverages increased wealth to assure that a neighborhood is inclusive.

This study is perhaps the best evidence we have yet of the nature and extent of gentrification in US cities.  It should dispel many of the widely repeated myths and misunderstandings about neighborhood change.  If we better understand the dynamics of urban neighborhoods, we’ll view gentrification not as a scourge, but as an opportunity to use the growing demand for urban living to build cities that are more diverse and inclusive.

Quentin Brummet and Davin Reed, The Effects of Gentrification on the Well-Being and Opportunity of Original Resident Adults and Children, Philadelphia Federal Reserve Bank Working Paper 19-30, , July 2019.

Home buying is a risky bet: There’s a 30% chance your house will be worth less in five years

It’s a widely agreed that promoting homeownership is a key means to help American households build wealth.  But as we and others have argued, homeownership can be a risky and problematic investment for many households–and is fundamentally at odds with the other pillar of housing policy–that housing ought to be affordable.

The latest reminder of the risky business of home ownership comes from financial blogger Felix Salmon, writing at Axios:

You wouldn’t make a 5x leveraged bet on the S&P 500 — not unless you were an extremely sophisticated financial arbitrageur, or a reckless gambler. Even then you wouldn’t put substantially all of your net worth into such a bet. Stocks are just too volatile. But millions of Americans make 5x leveraged bets on their homes — that’s what it means to borrow 80% of the value of the house and put just 20% down.

While homes are much less volatile than individual stocks, they’re just as volatile as the kind of diversified stock indices most people invest in.

The bottom line: Any given home has roughly a 30% chance of ending up being worth less in five years’ time than it is today. If you can’t afford that to happen, you probably shouldn’t buy.

Salmon links to data from housing investment firm Unison that plots the volatility of home prices in markets around the country. It turns out that home prices are nearly as volatile as major stock indices:

You can observe this volatility in markets around the country.  Almost on cue, the latest data for several markets around the country, ones that you wouldn’t expect, is showing how risky housing purchases can be. For example, prices in Portland and Seattle have both declined in the past year, showing that even “hot” markets with strong economies can experience home price volatility. Portland prices are down 1.6 percent over the past 12 months, Seattle’s are down 4.5 percent in the same time, according to Zillow. Zillow also predicts Seattle prices will decline into next year.

Whether homeownership turns out to be a wealth-building, or wealth destroying endeavor depends a lot on timing and luck–you have to buy the right house, at the right time, in the right neighborhood, for the right price. And the way housing and credit markets generally work, the most financially vulnerable households tend to make their housing investments at the wrong time, in the wrong neighborhoods and for the wrong price, and end up paying more both for their homes and their mortgages, putting them in the position of maximum exposure to market volatility.

There’s a wealth of biased information out there about the merits and safety of homeownership.  While media reports frequently draw attention to hot markets, and emphasize places where prices are increasing, there is considerable variability. It’s still the case, more than a decade after the housing bust, that inflation-adjusted home prices have yet to recover to their pre-collapse highs.  Even in the worst of times, for example, realtors are telling people “it’s a great time to buy a home.” In fact, when it comes to the real estate market, it’s always a good time for the buyer to beware, or at least be aware, of the risks of homeownership.

Note:  The commentary has been revised to more accurately characterize the business specialization of Unison.

Lingering racism holds down property values in majority black neighborhoods

For most American households, their home is their largest financial asset; how valuable that asset is, and whether it appreciates has a profound impact on a household’s financial well-being. Unsurprisingly, a big component of the racial wealth gap in the United States has to do with differences in rates of homeownership, and also in the value of homes owned by black and white households.

There’s a profound gap between the value of homes in majority black and predominantly white neighborhoods in the nation’s metropolitan areas, according to estimates from the Brookings Institution. Even after adjusting for home characteristics and neighborhood attributes, homes in majority black neighborhoods sell at a 20 percent or greater discount to otherwise similar homes in predominantly white neighborhoods.

The reasons for and implications of the value gap between white and black neighborhoods are complex. Lower value housing means incumbent homeowners have less wealth–but also implies that rents are lower and housing is more affordable in black neighborhoods than predominantly white ones. The devaluation of housing in black neighborhoods is primarily a result of the continued resistance many white homebuyers have to consider black neighborhoods, but also likely reflects the growing tendency of higher income black households to move to more suburban and integrated neighborhoods.

The Black/White Home Value Gap in Memphis

To get an idea of what this means in just one city, we look at the data for Memphis.

• Homes in majority black neighborhoods in Memphis are devalued by $2.3 billion compared to homes in predominantly white neighborhoods, according to estimates from the Brookings Institution.
• The typical home in a majority black neighborhood in Memphis sells for about $88,500, about $25,000 less than a similar house in a predominantly white neighborhood.
• Depressed values in black neighborhoods are correlated with lower wealth, but paradoxically may contribute to affordability.

These estimates come from a recent report from the Brookings Institution undertakes a detailed comparison of home prices in majority black neighborhoods compared to other neighborhoods in the United States. The report–The Devaluation of Assets in Black Neighborhoods— by Brookings scholars Andre Perry and David Harshbarger and Gallup’s Jonathan Rothwell uses home price data from 113 cities around the country and finds a consistent pattern of undervalued homes in majority black neighborhoods.

The Brookings Institution compared the sales value of owner-occupied homes in majority black neighborhoods with otherwise similar homes in exclusively white neighborhoods and found that the houses in black neighborhoods sold at a more than 20 percent discount to the homes in white neighborhoods. Here is a summary of the report’s findings for Memphis.

What this table means: This table shows that there are nearly 92,000 owner-occupied homes in majority black neighborhoods in the Memphis metropolitan area; of these, nearly 70,000 are owned by black homeowners. In the aggregate, these homes are worth about $8 billion, but would be worth more than $10 billion, if they were valued the same way as otherwise similar homes in similar, but predominantly white, neighborhoods.  The typical home in a majority black neighborhood has a market value of about $88,000, which is about $25,000 less than a similar home in a majority white neighborhood.

The figures in this table reflect the difference in home values after controlling for house and neighborhood characteristics. The gross difference (without these controls) between home values in majority black neighborhoods and exclusively white neighborhoods is even larger.  Majority black neighborhoods tend to be older, have smaller houses, and havefewer amenities and higher rates of poverty, compared to exclusively white neighborhoods.  Perry and his colleagues used a regression analysis to statistically control for the effects of structural characteristics (home size, age, etc), and neighborhood characteristics (crime rates, schools, commuting distances).  Even after adjusting for these effects–which explain some of the variation in home prices among neighborhoods–homes in majority black neighborhoods were still undervalued.

Economic Effects of Undervaluation

The data make a strong case that homes in majority black neighborhoods are systematically undervalued in comparison to otherwise similar homes in predominantly white neighborhoods. The magnitude of the disparity–the author’s estimate at $156 billion nationally–is also sizable.

The economic effects of this undervaluation are complicated and manifold.  First, it is obvious that homeowners in these neighborhoods, most of whom are black, have less wealth than they otherwise would have if their homes commanded the same values as those in predominantly white neighborhoods. If it weren’t for this devaluation, homeowners in these majority black neighborhoods would have significantly greater home equity.

Beyond that, the picture is more complex, and the effects are mixed. For renters, lower home and property values probably mean they pay lower rents. And it could also be the case that these same homes have long been undervalued, meaning that while current owners have less equity than if they were fairly valued, they may also have paid a lower purchase price to acquire the property.  The Brookings report is candid about these mixed effects:

. . . the devaluation of rental properties is advantageous to renters, in so far as it results in a lower rental payment for similar quality housing. The devaluation of owner-occupied housing makes it easier to acquire the home, but once purchased, it is unambiguously disadvantageous to the owner and occupier, who would otherwise benefit from being able to refinance, borrow, or sell at a higher valuation.

As we’ve often pointed out, there’s an inherent tension in US housing policy between affordability and wealth creation. Houses in majority black neighborhoods may be more affordable (i.e. sell at a discount to otherwise similar houses in predominantly white neighborhoods), but may therefore represent a loss of wealth for their owners.

What causes values to be depressed?

Why would otherwise similar houses in majority black neighborhoods sell for so much less than comparable houses in predominantly white neighborhoods? The first, and most obvious answer is the lingering effects of racism. Many white homebuyers may avoid searching in predominantly black neighborhoods, and the lower demand for housing in these areas causes prices to be lower.  It is also likely that “steering” by real estate agents — directing white buyers primarily to white neighborhoods — also has this effect.

The decline in values is also likely compounded by the decisions of black homebuyers.  Upper- and middle-income black households may rationally choose to buy homes in more integrated neighborhoods, not just for amenities like schools (which were arguably controlled for in the Brookings study), but also because they may believe that such neighborhoods will appreciate more. Over the past four decades, middle-income and higher-income black households have tended both to suburbanize and to integrate.  According to Patrick Sharkey of New York University, a majority of black middle class households now live in the suburbs and almost as many lived in neighborhoods that are not majority black. In 1970, fewer than a third of middle- and upper-income African-American households lived in majority non-black neighborhoods; today it is more than half.  In 1970, only about 20 percent of middle-and upper-income households lived in suburbs; today it is nearly half.

The exit of upwardly mobile black households from majority black neighborhoods has increased economic polarization according to David Rusk of the D.C. Policy Center.  Similarly, the relatively low prices of homes in majority black neighborhoods may mean that these are the only locations that black households with more modest incomes can afford.  The net result may be that lower-income homeowners become more concentrated in majority black neighborhoods. The movement of many black households out of majority black neighborhoods–particularly those households with means–coupled with the continued tendency of white households not to purchase in such areas likely both contribute to the housing price disparities observed in the Brookings report. Finally, as the report points out, the low value of homes in majority black neighborhoods means that homeowners there have less equity in their homes and therefore may find it difficult or impossible to sell and move to a different neighborhood.

Housing prices, like those of other investments, reflect not just the current utility or value of assets, but also the expected return.  Buyers will pay more for housing in areas they expect will appreciate.  Robert Shiller has shown that variations in buyer expectations of future home price appreciation play a key role in the formation of housing bubbles. The same tendency is likely to play out across neighborhoods in metropolitan areas:  Neighborhoods that are perceived as up and coming are likely to have a different price trajectory than neighborhoods that are seen as stagnant or declining.

One finding that these data suggest is that whites are paying a premium to live in all-white neighborhoods.  One implication of the substantial (20 percent plus) differential in home values between comparable houses in majority black and nearly all white neighborhoods is that white households are foregoing the opportunity to get a much less expensive home by buying in a black neighborhood.  Because some white households may be much less averse to having black neighbors, some of what we see as gentrification may be propelled by the substantially lower cost of housing in majority black neighborhoods.

Tomorrow, in part 2 of this series, we’ll take a further look at this issue of wealth disparities, and focus on how housing values in black and white neighborhoods have changed over time, and what challenges that closing this gap poses for policymakers.

One thing economists agree about: pricing carbon is essential to saving the planet; but if you don’t believe economists, you ought to believe Bill Nye, the Science Guy.

Economists are famous for disagreeing with one another. For every proposition, there is an equal and opposite economist. An even economists frequently have trouble selecting a single conclusion. Harry Truman famously lamented that he wanted a one-armed economist, so that he would never find his advice qualified with “on the other hand.”

Economists of all political stripes support carbon taxes

It’s striking, therefore that the leading lights of the profession, conservative and liberal, freshwater and saltwater, republican and democrat, are all in broad agreement on what it will take to tackle our growing climate crisis.  Their collective statement on climate change was published by The Wall Street Journal.  It’s clear, direct and to the point.  We reprint it in its entirety here.

Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

Let’s require that highways really be accessible to those who can’t drive:  State highway departments should provide bus service on state roads for the disabled

The Americans with Disabilities Act was landmark legislation to make sure that the disabled were not denied equal access to the public realm. The ability to travel freely is an important part of accessibility, and the ADA has made considerable progress in making public buildings, restrooms, city sidewalks and transit vehicles easier for the disabled to use. Highway departments have generally been laggards.

For example, fewer than 3 percent of the sidewalk ramps along Oregon highways comply with the requirements of the American’s with Disabilities Act (ADA), according to a recent report. The lack of ramps is a major mobility issue; state highways are often main streets of smaller towns, and these key bits of infrastructure are critical go giving everyone equal access to their communities and not being halted by barriers.” After threatened legal action, the Oregon Department of Transportation has agreed to start spending several tens of millions of dollars each year to build ramps.  With luck, the department hopes to have the backlog addressed by 2032.

Here’s an example (from California) of the kind of ADA compliance we’re talking about.

There’s a ramp that connects the sidewalk on one side of the freeway on-ramp to a similar ramp on the other side of the freeway on-ramp.  Notice that this doesn’t actually make the freeway “accessible” to a disabled user–it simply makes it slightly less likely that they will be killed or injured trying to cross the freeway on-ramp. Such ramps don’t make it possible for the disabled to “use” the freeway, so much as to make it slightly less hazardous when they actually don’t use the freeway.  Even with the ramps in place, it’s still the case that its both physically impossible or simply illegal for a disabled person to use the freeway itself for its intended purpose (traveling from one point to another) unless they have a car and someone who can drive it for them.

So while the settlement making these crossings somewhat less pedestrian-hostile  is definitely a positive step, we think it might be a good idea to go further. All the ADA requires now is that those who can’t drive a car have a safe way to cross a road without one. But its still the case that if you don’t own or can’t drive a car, there’s no way for you to use a state highway, unaided, for its intended purpose–getting from one part of the state to another. The highway is only usable by those with the physical wherewithal (and financial resources) to operate a vehicle (usually a car, but in many places, bikes as well).

In contrast, look at how the American’s with Disabilities Act applies to transit providers. There’s a wide disparity between how ADA requirements affect transit agencies as compared with highway departments. Not only do transit agencies bear the cost of retrofitting transit vehicles with wheelchair ramps and kneeling capability, but most also operate complementary on-demand or dial-a-ride services for those with disabilities. As long as you’re want to travel in a transit agency’s service area, they’re generally required by ADA to provide such services.

These paratransit services are expensive. Portland’s transit operator, Tri-Met, spends about $35 million annually for its LIFT and cab services, providing slightly more than one million rides at a cost of more than $30 per passenger, almost 10 times the cost per passenger of its fixed route transit services (Tri-Met Proposed Budget, FY2016, Exhibits 5 and 6). Fares cover about 4 percent of total LIFT costs, meaning that more than 95 percent of the costs of this service are subsidized from other sources.

There’s a profound double-standard in the ADA when it comes to transportation. Bus companies have to provide separate vehicles for those who can’t use buses or trains, but highway departments have no similar obligation to make provide vehicles to those who can’t drive.

The point of these expenditures is to assure that the destinations served by the transit system are equally accessible to all citizens regardless of their disability status. The same standard, of course, doesn’t apply to highways. If you can’t operate a vehicle due to a disability, the destinations served by the highway system are inaccessible to you, but the state Department of Transportation provides no auxiliary service to those who can’t operate vehicles.

A modest proposal:  have the highway department provide vehicles for those with disabilities

The Americans with Disabilities Act, passed in 1990, was a major expansion of rights for the nation’s differently abled citizens. It generally provides that in employment, and in the public realm, governments, employers and landlords have to provide reasonable accomodation for those who are disabled.

The ADA has led to a wealth of changes in the way buildings, streets, and bathrooms are designed. Cities are rebuilding sidewalk intersections with wheelchair ramps. Parking lots regularly set aside the most convenient parking spaces for use by the disabled. Bathrooms have wider stalls and lower sinks to accomodate those with limited mobility.

But highways, particularly our interstate freeway system is legally inaccessible to those with disabilities.  In most states, its simply against the law to walk (or use a mobility aid) to travel on an interstate freeway.  Millions of Americans, due to disability (and also due to age) are legally or practically barred from making independent and equal use of the taxpayer supported highway system.

According to the US Department of Transportation more than 25 million Americans have travel-limiting disabilities.  Of those with such disabilities, fully 40 percent (or roughly 10 million) are unable to drive.

What we’d propose is extending the ADA to require that highway departments offer passenger vehicle service (like buses or ride hailed cars) to provide access to state highways for everyone. If you have a state highway that connects Portland with Salem, and it is really going to be “accessible” to the disabled, then the state ought to provide transit or some form of dial-a-ride service for those who are so disabled that they can’t operate their own vehicle. On lightly traveled routes, the highway department might subsidize vans; on larger roadways it could subsidize scheduled bus service.

That’s not entirely unimaginable. Already, the Oregon Department of Transportation runs  bus service from the Portland area to Multnomah Falls to reduce traffic congestion to this tourist attraction. The agency could just as easily contract for bus service along interstate routes and major state highways.

If highway departments were required to act with anything approaching the same degree of responsibility to disabled citizens who are unable to use the freeway system, they would provide a wide-ranging system of scheduled buses and on-demand vehicle services. It’s worth asking how that might be paid for. Again, applying an analogy to the transit system, highway departments could charge users of buses or dial-a-ride alternatives exactly the same they charge freeway users:  the combined per gallon gas tax paid by a typical car works out to about 2-3 cents per mile of vehicle travel, so it would be entirely fair to have the disabled pay an equivalent amount for their access to the system as well.

If we’re serious about giving the disabled equal access to the public realm, they ought to be able to travel on the expensive roadway system we’ve built that is so vital to connecting to almost every aspect of modern life.  Ours is really a modest proposal that the agencies operating the nation’s highways provide the same accomodation to the disabled that the nation’s transit operators have provided for decades.

We celebrate the fourth of July by remembering that a nation composed overwhelmingly of immigrants owes them a special debt.

America is a nation of immigrants, and its economy is propelled and activated by its openness to immigration and the new ideas and entrepreneurial energy that immigrants provide. Its commonplace to remind ourselves that many of the nation’s greatest thinkers and entrepreneurs, Andrew Carnegie, Albert Einstein, Andy Grove and hundreds of others, were immigrants, if not refugees. All six of America’s 2016 Nobel Laureates were immigrants. The latest American Survey of Entrepreneurs, conducted by the Census Bureau shows that immigrant entrepreneurs who have started companies are both more likely to be concentrated in the important computer and information technology industries, and that these companies are stronger in innovation that similar firms started by native born Americans.

The fact that America stood as a beacon of freedom, and a haven from hate and oppression, has continually renewed and added to the nation’s talent and ideas. Immigration has also played a critical role in helping revitalize many previously depressed urban areas and neighborhoods. As Joel Mokyr explained in his terrific book “A Culture of Growth,” the key factor triggering the Enlightenment and the Industrial Revolution was the ease with which heterodox and creative thinkers could find sanctuary in other countries and spread their thinking across borders. The US was founded on the kind of openness and tolerance than underpinned this process, and flourished accordingly.

What’s true for our nation is especially true for the cities that power the nation’s economy. The health and prosperity of city economies hinges directly on their ability to be open to newcomers and new ideas. Immigrants are a source of economic energy for urban economies. Robert Shiller, winner of the Nobel Prize in Economics, quoting urbanist Jane Jacobs:

Cities grow organically, she said, capturing a certain dynamic, a virtuous circle, a specialized culture of expertise, with one industry leading to another, and with a reputation that attracts motivated and capable immigrants.

The critical role of immigration is abundantly clear when we look at the health and productivity of the nation’s urban economies. The metro areas with the highest fractions of foreign-born well-educated workers are among the nation’s most productive.

Metros with the most foreign born talent

Our benchmark for measuring foreign-born talent is to look at the proportion of a region’s college-educated population born outside the United States. We tap data from the Census Bureau’s American Community Survey, which tells us what share of those aged 25 and older who have at least a four-year college degree were born outside the United States. (This tabulation doesn’t distinguish between those who came to the US as children and were educated here, and those who may have immigrated to the US later in life as adults, but shows the gross effect of all immigration). In the typical large metropolitan area in the United States, about one in seven college educated adults was born outside the nation. And in some of our largest and most economically important metropolitan areas, the share is much higher: a majority of those with four-year or higher degrees in Silicon Valley are from elsewhere, as are a third of the best educated in New York, Los Angeles, and Miami.

Foreign born talent and productivity

We’ve plotted the relationship between the share of a metropolitan area’s college-educated population born outside the United States and its productivity, as measured by gross metropolitan product per capita.  Gross metropolitan product is the regional analog of gross domestic product, the total value of goods and services produced, and is calculated by the Bureau of Economic Analysis.  The sizes of the circles shown in this chart are proportional to the population of each of these metropolitan areas.

These data show a clear positive relationship between the presence of foreign-born talent and productivity.  Several of the nation’s most productive metropolitan areas–San Jose, San Francisco, New York and Seattle–all have above average levels of foreign-born persons among their best educated.

Of course, these data represent only a correlation, and there are good reasons to believe that the arrows of causality run in both directions: more well-educated immigrants make an area more productive and more productive areas tend to attract (and retain) more talented immigrants. But it’s striking that some of the nation’s most vibrant economies, places that are at the forefront of generating the new ideas and technology that sustain US global economic leadership, are places that are open and welcoming to the best and brightest from around the world.

There are many of reasons to oppose Trump Administration’s repeated attempts to close America’s borders to immigrants. The most important reasons are moral, ethical and legal. But on top of them, there’s a strongly pragmatic, economic rationale as well: the health and dynamism of the US economy, and of the metropolitan areas that power the knowledge-driven sectors of that economy, depend critically on the openness to smart people from around the world.