6 NEIGHBORHOODS AS MARKETS
Neighborhoods mean many different things to people, but one fundamental feature of every neighborhood is its role as a market, that is, an economic system “that allows buyers and sellers to exchange any type of goods, services and information.”1 Within any neighborhood, the properties that are offered for purchase or lease constitute the goods being offered in the market. The buyers (or lessors) are anyone who wants to live, own property, or conduct a business in the neighborhood. Indeed, to the extent that one thinks of a neighborhood as a physical or geographic entity, one could even argue that a neighborhood is a market, no more no less.
Clearly, that is not the case. But while people may think of neighborhoods in emotional or social ways, much of what we care about when we think of neighborhoods is based, in ways that may not always be immediately visible, on an underlying foundation of housing market activity, on choices people make about where they want to live, and on their willingness to make a financial as well as emotional commitment to that place. People make those choices for reasons, and neighborhoods compete with each other to be chosen. As traditional forces that may have once sustained neighborhoods independent of market considerations—such as ethnic identity or attachment to a particular institution such as a factory, church, or social club—have waned, people’s decisions to live in one area rather than another are increasingly driven by market-based choices. This chapter explores how neighborhood markets work, what drives them, and how they affect the complex package of conditions that drive neighborhood change.
Earlier we discussed the extent to which neighborhoods are a feedback system. The market is a central part of that system, reflecting the constant flow of information from buyers, sellers, and intermediaries that is the essence of any market. In contrast, however, to economists’ idealized notion of a self-correcting system of balancing feedback loops that naturally heads toward equilibrium, the complex behavioral nature of neighborhood markets, along with exogenous factors affecting neighborhoods such as migration and economic restructuring, means that they experience reinforcing feedback loops tending toward disequilibrium and instability. Thus, the natural state of a neighborhood is not stability but change. While change can often be positive, it can also be destabilizing and ultimately threatening to the sustainability of good neighborhoods.
The strength or weakness of the neighborhood housing market, reflected in the extent to which individuals choose to live in that neighborhood rather than elsewhere, may be the single most important factor determining the neighborhood’s overall vitality or weakness. When people make an affirmative choice to move into a neighborhood, they are then likely to behave in ways that enhance the neighborhood’s vitality. If people live in a neighborhood, however, because they lack choices and leave if they gain the means and ability to do so, that neighborhood’s social cohesion and vitality are far more likely to deteriorate rather than improve. Put differently, a good neighborhood is far more likely to exist when the people who live there choose to remain and the people who move in do so by choice rather than for lack of affordable alternatives. Those choices are, more often than not, market choices.
When more people choose to live in a neighborhood, the area’s real estate market becomes stronger. Increased real estate market strength—reflected in strong housing prices, a steady volume of sales, and a healthy rate of appreciation over time—in turn leads to important changes in the way property owners behave. In a strong or improving housing market, both homeowners and landlords are more likely to invest in their properties, contractors are more likely to rehabilitate vacant properties or build new infill housing on vacant lots, and tax delinquencies and foreclosures will be rare. Residents who see their neighborhood improving are likely to be more attached to the area and more likely to remain even if they have the means to leave. Upwardly mobile homeowners will be more likely to stay in their present homes or buy new homes in the neighborhood rather than move out, while renters looking to become homeowners will be more likely to buy in the neighborhood rather than elsewhere.
This does not mean, of course, that having a strong or rising residential market ensures a good neighborhood that benefits all its residents. While real estate change can trigger positive change in a neighborhood, this is not a guarantee, nor are its outcomes necessarily all positive. Higher housing costs, particularly when they are spurred by regional housing shortages or speculation rather than enhanced quality of life, can undermine the social fabric that gives a neighborhood its vitality, triggering changes—such as reduced affordability and greater residential overcrowding—that may reduce rather than improve residents’ quality of life. Even where the higher costs reflect improvement in the area’s quality of life, prices that rise too rapidly may render the area unaffordable to less affluent longtime residents.
Market Forces and Market Actors
A neighborhood is affected by exogenous and endogenous market forces and by market actors, the entities that participate directly or indirectly in the market. The principal forces affecting neighborhood housing markets are shown graphically in figure 6.1.
Neighborhoods exist in citywide and regional contexts. A neighborhood in Buffalo, in a region that has lost population and where economic growth is modest, will have a significantly weaker neighborhood market than a neighborhood identical in all significant respects in New York City, even though both neighborhoods may be in the same relative position in their respective markets. Thus, a dilapidated house located in the Washington, D.C., Anacostia neighborhood, a house that requires considerable work to be livable located in a neighborhood where household incomes are only modestly above the poverty level, was listed at Zillow in January 2020 for $300,000 “as is.”2 The same house in Detroit would probably be slated for demolition.
FIGURE 6.1. Principal forces affecting neighborhood housing markets
In addition to regional demographic and economic trends, neighborhood markets are affected by competition from other neighborhoods offering similar features across the region. Few neighborhoods, particularly in large metros containing hundreds of distinct neighborhoods, are unique. While some neighborhoods may be able to carve out distinct market niches within their region by offering a particular configuration of features that appeal to a distinct segment of the market, such as artists or gay couples, such examples are rare.
In contrast to markets for many other products such as toasters and T-shirts, where the transaction involves relatively few significant actors beyond the buyer, the seller, and a key market intermediary such as Walmart or Amazon, many different actors in addition to buyers and sellers play significant roles in neighborhood housing markets. While home buyers and sellers, for example, are direct market actors, neighborhood community development corporations and local government agencies, although not directly engaged in buying or selling, can be indirect market actors because they act in ways designed to affect the market or that inadvertently affect the market. Similarly, when lenders historically redlined certain neighborhoods, they were behaving as market actors, albeit malign ones, since their refusal to participate in those neighborhoods’ markets deprived the neighborhoods of a critical element needed to make their market work. The principal market actors are shown in table 6.1. The first four categories in the table are transactional actors; in other words, they are directly engaged in the buying and selling transactions that in the literal sense constitute the market. While the roles of buyer and seller are straightforward, as are for the most part those of the parties we refer to as “transaction entities” such as brokers and appraisers, the role of lenders and other capital providers is more complex.
Neighborhood markets cannot function without third-party capital. Access to adequate capital in the form of mortgage loans to home buyers, investors or buyers of commercial properties, home improvement loans, construction and bridge loans to developers, loans to businesses for fit-out and equipment, and lines of credit to small businesses and contractors are the essential fuel needed to make possible the transactions that sustain a well-functioning market. The public and private entities that exist to provide these resources act as gatekeepers for capital access, thus determining whether a well-functioning market can exist. In the past when many lower-income and African American neighborhoods were redlined, meaning that lenders no longer provided capital for transactions in those areas, their real estate markets withered, with devastating effects to both the quality and quantity of housing in those areas. Capital access on reasonable terms is particularly important to home buyers. While absentee property investors often have access to nontraditional sources of financing such as hard money lenders, home purchases are largely dependent on the availability of mortgage financing.
Home-purchase mortgages are the tip of the capital iceberg. Homeowners and landlords need loans to repair and upgrade their properties, while homeowners benefit from home equity lines of credit for debt restructuring, higher education, or starting a small business. Small developers, who play a critical role in expanding neighborhood market supply by rehabilitating dilapidated properties and building new ones, need short-term financing for acquisition, predevelopment costs, and construction. Finally, commercial loans to acquire a property or a business and purchase equipment and inventory and lines of credit to manage uneven operating cash flows are needed to sustain a viable neighborhood retail and services base.
While banks and other lenders are generally seen as the key financial players, the role of government in setting the ground rules for capital access is a significant one. Many home-purchase mortgages, particularly in lower-income neighborhoods, are made through the Federal Housing Administration (FHA), which provides federal guarantees for mortgage loans. In Baltimore, nearly 60 percent of all home-purchase mortgages in census tracts in the lower half of the city’s income distribution in 2018 were government-insured, compared to 30 percent in the upper half and 18 percent in the top quartile.3 The federal government also creates a secondary market for mortgages through Fannie Mae and Freddie Mac, infuses loan capital into the banking system through the network of federal home loan banks, and establishes the regulatory framework for lending through a maze of seemingly overlapping government agencies, including the Federal Reserve System, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau.
While capital access is rarely a problem in affluent neighborhoods, it has long been an issue in lower-income neighborhoods with lower property values. During the years following the foreclosure crisis, the imposition of stricter underwriting standards for borrower credit scores and property appraisals led to a sharp drop in credit access in many struggling neighborhoods already hard hit by subprime lending, foreclosures, and the Great Recession. While not the only factor, credit constraints significantly contributed to the fact that many of these neighborhoods had not recovered ten years after the end of the recession.
Part of the reason for inequitable capital access is the multiplicity of “gatekeepers,” any one of which can potentially block access to capital for any individual buyer and, by extension, to the neighborhood as a whole. In chapter 4, we discussed how from the 1930s to the 1960s the FHA and private lenders effectively made many older urban neighborhoods off-limits for mortgage borrowing and excluded African American families from growing suburban neighborhoods. Long after the Fair Housing Act had made overt racial discrimination illegal, informal practices such as racial steering by real estate agents, in which buyers were only shown houses in areas that fit the agent’s idea of racial suitability, continue to affect neighborhood housing markets and distort buyers’ housing choices.4
More recently, attention has focused on the role of real estate appraisers as market gatekeepers, particularly with respect to their role in undervaluing properties in Black neighborhoods.5 Appraisals, which represent an estimate by a presumably trained analyst of the “true” market value of a property, play an important and often underappreciated role in capital access, since the appraisal determines the amount that a lender is willing to lend on a property, typically some percentage—most often 80 percent—of that value.6 Thus, if the price agreed upon by the buyer and the seller is significantly higher than the value set by the appraiser, the lender will only lend 80 percent of the lower amount, thus requiring the buyer to come up with far more cash equity than he or she had anticipated or may have available. In low-value areas, a low appraisal may lead a lender to refuse to lend at all on the grounds that the value of the property, which is collateral for the mortgage loan, is too small to justify the loan. Although we believe that low values in Black neighborhoods are more a function of structural racism in home-buying decisions and that much of the seeming bias in appraisals reflects this reality rather than being driven by the appraisal process itself, it is an important example of the power of relatively invisible gatekeepers to influence neighborhood capital access.
Environmental actors collectively create the larger environment within which the neighborhood market operates. Their influence can be direct, as with developers who build houses to add to the area’s housing supply, or indirect, in the way the quality of public services or infrastructure can influence buyer and seller perceptions and behavior.
The principal reason that environmental actors play such important roles is that while on its face the essence of the market appears to lie in individual property transactions, it is in fact a market for neighborhoods. The market for individual properties is interwoven with and dependent on the market for the neighborhood. People may not literally buy neighborhoods, but when they buy a house they are buying a share in a neighborhood, something that most buyers fully understand. Environmental actors may not define the features of the individual properties being bought and sold but instead define the features that make up the character of the neighborhood, which determine the core neighborhood values that we characterize as amenities and stability, which in turn largely drive consumer decisions.
We now turn to the question of how neighborhood features affect the choices made by prospective consumers of a neighborhood. We will focus on the residential market, which is far more central to the dynamics of most neighborhoods than the commercial market, and for reasons we discuss below will emphasize the home buyer market.
Consumer Choice and Neighborhood Markets
Markets are based on the principle of consumer choice. Just as consumers pick cars or Cuisinarts, prospective homeowners and tenants pick neighborhoods, albeit usually for more complicated reasons. Before exploring those reasons, however, we need to place the idea of consumer choice in context.
A world where all consumers have equal choices and equal information and where nonmarket forces, including laws and public policies, play little or no role is a fantasy. While neighborhood markets can be considered free markets in the strict sense that they are largely open to all comers and provide for relatively open bargaining between buyers and sellers, consumer preferences are both influenced and constrained by many factors, beginning with income and wealth and including economic, social, psychological, cultural, and racial factors, as well as by public policies and regulations, all filtered through each consumer’s often irrational and biased perceptions along with uneven, inconsistent access to information. Neighborhood choice can be expressed in a quasi-mathematical formula as follows:
Constraints on choice, both formal and informal, are powerful. Some are a function of the market itself, such as the limits on choice imposed by a working-class family’s modest income and wealth. Others are exogenous to the market and often pernicious. An African American family that might have chosen to buy a home in Levittown on Long Island in 1950 would have been unable to do so because of the racial restrictions imposed by FHA underwriting. Seemingly neutral or benign governmental action such as building codes, which define building standards and thus set the de facto minimum cost of properties, and zoning codes, which limit the variety of housing types that can be constructed in different areas, further distort the market.
Public actions influence or constrain housing choices but do not determine them. This is an important distinction. FHA policies limited which families could get mortgages to buy in Levittown but did not determine who wanted to live there. Similarly, although construction of the interstate system may have accelerated suburbanization around American cities, the fact that the interstate system was authorized in 1956 and largely built in the 1960s, well after the onset of mass suburbanization, should make clear that it did not cause suburbanization.7
The combination of FHA lending practices (which prioritized new suburban development over existing urban neighborhoods and enforced racial segregation in suburban subdivisions), urban renewal and the construction of interstate highways through the hearts of American cities had a traumatic effect on preexisting urban neighborhoods, disproportionately affecting lower-income and African American neighborhoods.8 While these programs and practices ended by the 1970s, they left lasting scars.
It would be a serious error, however, to see the fate of urban neighborhoods since then as having been determined by those policies and practices. The collapse of once-vital Black neighborhoods such as Bronzeville was tragic, but many more factors were involved including the exodus of the Black middle class to areas that had been opened up by white flight as well as the loss of Chicago’s industrial base. Ironically, had suburban developments such as Levittown been open to Black home buyers from the beginning, the exodus from traditionally Black neighborhoods and from the cities in general might well have been even faster and more traumatic in their ultimate effect on urban neighborhoods.
Both consumer choices and neighborhoods are segmented. Consumer preferences vary, with some predictability based on such factors as household type and size, especially the presence of children; age and stage in life cycle; and somewhat less predictably, lifestyle or cultural preferences. They are also segmented by race, most notably reflected in the racially driven reluctance of white home buyers to buy in predominantly Black neighborhoods.9
Neighborhoods are similarly segmented by whom they appeal to most strongly; the preference of highly educated millennials for dense central-city downtowns can be contrasted with the preferences of child-raising couples for neighborhoods of detached single-family houses, with or without white picket fences. Research on consumer segmentation has become quite sophisticated. The market research firm Claritas has developed what it calls its PRIZM model, which divides all American households into sixty-eight distinct categories oriented along social group and life stage group axes and given catchy names such as “Aspiring A-listers” and “Campers & Camo.”10
However much the PRIZM model may strike some as overkill, it recognizes that preferences are cumulative rather than distinct; in other words, a couple with small children may be looking for a neighborhood of single-family houses, but their educational level, their cultural and lifestyle preferences, and even their political orientation will progressively narrow their preference to a subset of such neighborhoods.11 The extent to which such a particular couple can act on their preferences, of course, will depend on not only whether a neighborhood meeting their criteria exists but also their income and assets.
A healthy neighborhood should have housing options for both homeowners and renters. There are major differences, however, between the decision-making process of home buyers and renters as well as in their impact on neighborhood conditions. Unfortunately, in some circles this often seems to be translated into a simplistic and misguided “homeowners good, renters bad” echo of Animal Farm. Much of the difference between home buyers and renters lies in the disparity in stability of tenure. The typical homeowner remains in the same dwelling for far longer than the typical renter. In Indianapolis the median homeowner has lived in the same dwelling for twelve years, the median renter for twenty-one months.12
A second factor is the difference in incomes. Homeowner incomes are typically much higher than those of renters, giving them far more choices in the market. In Atlanta, the median household income of homeowners is over $98,000 compared to not quite $39,000 for renters. Given typical rents and sales prices in the Atlanta area, a median home buyer could afford the great majority of houses for sale in the area in 2020, while a median tenant would have far more limited options. Furthermore, the transaction costs and “stickiness” of homeownership are far greater than for rental tenure. Down payments and closing costs are a far greater expense than security deposits, while the effort needed to exit homeownership is so much greater that some researchers believe that homeownership has a significant negative effect on labor market mobility.13 This makes the stakes that much higher for home buyers.
The upshot is that home buyers, with a wider range of options as well as the intention to remain in place for an extended period, tend to give greater weight to nonpecuniary factors with respect to both the house and the neighborhood, while renters, with fewer choices, tend to focus more narrowly on simply finding a unit they can afford and a landlord who will accept them.14
These dissimilarities translate into significant differences in the relative impact of homeowners and tenants on neighborhood conditions. A vast body of research on the effects of homeownership consistently shows significant effects on social capital and collective efficacy; social and behavioral factors, particularly youth behavior and outcomes; and property maintenance and improvement.15 This is not to suggest that the presence of renters in reasonable numbers has a negative effect on a neighborhood per se but rather that their presence does not appear to trigger the positive features associated with homeownership.16
Although home buyers may have more options than renters, for most their choices are still constrained. In addition to the obvious constraints imposed by a buyer’s limited income and cash resources for down payments and closing costs, constraints can be imposed by racial or ethnic characteristics or by cultural or psychological factors. While overt discrimination by race or ethnicity is now illegal, informal discrimination persists in the form of racial steering by real estate agents and discriminatory lending behavior, including steering to more expensive mortgage products and disparate loan-denial rates. With respect to cultural or psychological issues, the line between constraints and preferences tends to become fuzzy. For example, the desire of a newly arrived immigrant family to live in an immigrant enclave is arguably more than a preference; it is a constraint imposed by that family’s psychological and cultural support needs. The tendency of such enclaves to dissolve over time unless replenished by a flow of new immigrants represents a process by which those constraints are removed and households are thus increasingly able to act on their personal preferences.
In the final analysis, all consumers are looking for the best match between neighborhood characteristics and their preferences within the boundaries established by their constraints. In the course of their search, they make explicit or implicit trade-offs between different neighborhood features. Specifically, they are looking to match their preferences with four distinct neighborhood features: supply, location, amenities, and stability and risk. The first two are relatively straightforward, but the other two raise more complex issues.
Housing Supply
The most fundamental issue for home buyers is whether a neighborhood contains homes that meet their criteria with respect to price, size, features, and condition. A family with children will look for a house or apartment with multiple bedrooms as well as ample space for children’s activities, while most families will look for a house or apartment that requires relatively little work on their part to render it livable. The market for fixer-uppers or “handyman’s specials” is a small one, outside a handful of up-and-coming hipster neighborhoods in large cities. In contrast to neighborhood criteria such as stability and amenities where a prospective home buyer’s preferences often tend to be relatively general and often based on limited or unreliable information, preferences for the home itself tend to be much more specific although constantly subject to renegotiation in light of price and other constraints.
Location
Location preferences can be defined as proximity or ease of access to places important to the members of a home buyer’s household, particularly workplaces. Consumers vary widely, however, in their tolerance for extended journeys to work or, alternatively, in their preference for or dependence on public transportation. A significant share of the residents of low-income urban neighborhoods rely on public transportation for their work trips and may be reluctant to move to an area that lacks access to public transportation even if they could afford to do so. Conversely, price affects locational decisions, particularly in high-cost regions; the real estate adage “drive till you qualify” reflects the reality that neighborhoods close to the most important destinations, particularly in strong market cities such as San Francisco and Seattle, tend to be unaffordable to most buyers. As a result, buyers may trade off longer commutes for housing quality or affordability.
Amenities
Just as prospective buyers vary in their preferences for location and housing, they also vary in the amenities they look for in a neighborhood. In contrast, however, to the relatively easily defined features of the former, amenities tend to reflect less explicitly held subjective preferences. To one child-centric source, neighborhood amenities are simply “the presence or absence of sidewalks, parks/playgrounds, and recreation centers.”17 Conversely, a study that focused on older adults defined amenities as the proximity of food retail, community-serving retail, services, and civic and community facilities.18 Amenity and stability elements, discussed immediately below, are often conflated, as in a Forbes article that lumps factors such as low crime rates and pride in homeownership together with others such as outdoor activities and proximity to public transportation as “what makes a neighborhood truly great.”19
From a market perspective, amenities are those elements in a neighborhood which are perceived by a prospective buyer as making it a more desirable or appealing place to live. What those are will vary from buyer to buyer. They can be as straightforward as easy access to parks or the presence of a mature tree canopy along residential streets or as intangible as neighborhood character or identity. They are highly subjective and influenced by a wide range of family and individual characteristics such as age, child-rearing status, activity preferences, cultural values, race and ethnicity, and social class.
Features of a neighborhood that may be seen as amenities by some individuals may be irrelevant or even negative factors to others, particularly in a neighborhood that contains a heterogeneous mix of residents. It is important, however, not to conflate amenities in the market sense with what are often treated as neighborhood “assets” in the community development world.20 While there are many features of a neighborhood that may be seen as assets by people who live in the neighborhood, including services such as senior centers and health clinics and “third places” such as barbershops and taverns, those amenities may not be perceived as meaningful or relevant by people making home-buying decisions.
Stability and Risk
While the role of neighborhood amenities in consumer choice links concrete realities such as a park or a light rail stop with subjective preferences, the role of neighborhood stability, which arguably may be the most important of all elements affecting neighborhood choice, is heavily grounded in perceptions and in the interpretation of often ambiguous information.
Stability is not meant in the literal sense of indefinitely remaining the same. All neighborhoods change, upwards, downwards, or sideways. We define neighborhood stability as the perception that the neighborhood is and is likely to remain (or become) a good place to live and is therefore a sound place in which to make both a financial and a psychological investment. Kahneman and Tversky’s prospect theory, illustrated in figure 6.2, underlies the importance that we place on this aspect of neighborhood choice.21 That theory, vastly oversimplified, holds that when people make important decisions, the fear of loss significantly outweighs the hope of gain. This is particularly powerful when applied to the home-buying decision, which for most American families represents their most significant financial investment as well as a significant personal and emotional commitment. Applied to neighborhood choice, this theory suggests that prospective buyers will be driven to avoid what they perceive as negative features of a neighborhood, since those features increase the risk of loss, both with respect to the financial as well as the hedonic utility of their investment.22 We find this argument compelling. It helps explain the importance of crime, race (to white buyers), and school quality in the home-buying decision.
FIGURE 6.2. The Kahneman and Tversky curve
(Authors’ work based on Kahneman and Tversky prospect theory)
On its face, the importance given to school quality in the home-buying equation would appear to be self-evident, reflecting the value that parents place on the education of their children. On closer examination, that assumption is placed in question by the fact that most American households today do not have school-age children. Only 22 percent of all American households contained school-age children in 2017, many of whom did not go to public schools, while according to the National Association of Realtors, 70 percent of home buyers in 2018 did not have school age children in the home.23 The number does not change greatly if one adds households with preschool children to the number of school-centric households.
The importance of school quality, however, is more than adequately explained by the role of school quality as a proxy for neighborhood stability and for the probability of house value appreciation.24 It is arguably the single most powerful positive element within the cluster of features that constitute neighborhood stability, as in most respects stability is perceived as the absence of negative features.
The most obvious negative feature is crime, in particular violent crime. The role of both the reality and the perception of crime in driving neighborhood decline has long been recognized.25 Perceived disorder, in terms of both visible social disorder (public drinking, prostitution, vandalism) and physical disorder (graffiti, debris, broken streetlights), are closely related to perceived crime and affect neighborhoods similarly to actual criminal activity.26 A prospective buyer’s perception of disorder can also be triggered by different visual stimuli observed while walking or driving through a neighborhood, ranging from prominent features such as the presence of abandoned buildings or trash-strewn vacant lots to details such as tall chain-link fences in front yards, bars on ground-floor windows, or sagging porches. Neighborhoods, like homes, can have or lack so-called curb appeal.
While crime and disorder are realities, perceptions of crime and disorder are filtered through implicit values and biases, particularly implicit racial bias. Research studies have found that white subjects perceive neighborhoods with large Black populations as being more dangerous, independent of actual crime levels, and that their perceptions of neighborhood disorder are strongly affected by their perception of the share of Black residents in a neighborhood.27 Another study found that white respondents shown a series of images of identical neighborhood scenes rated the neighborhoods significantly lower on a scale of neighborhood conditions when the people in the pictures were Black than when they were white.28
The persistence of underlying racial bias means that white home buyers—who still make up the great majority of home buyers in most areas—although increasingly open to buying homes in racially mixed areas, remain highly unlikely to do so in predominantly Black neighborhoods, usually not even looking at those neighborhoods in the course of their home search.29 This in turn contributes significantly to the market weakness of many predominantly Black middle-class neighborhoods, since in most parts of the United States the Black home buyer pool is not large enough to fully absorb the supply of housing in those neighborhoods. This problem, which is reflected in and magnified by the appraisal issues noted earlier, has grown in recent years as a result of the increasing tendency of Black home buyers to buy in suburban or racially mixed neighborhoods rather than in traditionally Black urban middle-class neighborhoods.30 In the final analysis, large numbers of white home buyers continue to perceive Blackness per se as a risk factor leading to decisions to avoid buying in predominantly Black neighborhoods.
Stability and amenities are not fixed properties of neighborhoods. They are the product of the interaction of many factors in which public policies, particularly those of local government, play important roles. How local governments allocate their resources to provide public services, build or maintain publicly owned facilities, enforce housing codes, address vacant abandoned properties, and support the work of community-based organizations all affect a neighborhood’s quality of life and how it is perceived by both the residents of the neighborhood and those who might contemplate moving there.
The interactions between the functions performed by the many different units of local governments with one another and with nongovernmental actors, such as resident organizations and neighborhood-based institutions, are not only complex but also powerful in their implications for an area’s vitality, quality of life, and market strength. Regrettably, few cities appear to be aware of the importance of these interactions or, if they are aware, they appear to be willing or able to develop a more systematic focus on using public policy as a tool to nurture good neighborhoods.
Finally, change, while inevitable, is itself a potential destabilizing factor whatever the nature and direction of change. Healthy neighborhoods have coping mechanisms. As Jane Jacobs wrote in The Death and Life of American Cities, a healthy neighborhood is one “that keeps sufficiently abreast of its problems so it is not destroyed by them.”31 Neighborhood coping mechanisms, however, can be overwhelmed by too much happening too soon. As Rachel Woldoff points out in her ethnographic study of change in an urban neighborhood, the intensity of destabilization is related to the pace of change.32 An isolated problem such as a foreclosure or the appearance of graffiti on one brick wall can be assimilated. At some point, however, if the problems mount, neighborhood resilience can break down, and reinforcing cycles of decline can emerge.
Information Channels
Perceptions and information are intimately related. No one has perfect information about the market, while most people fail to even come close. The process by which individuals gather information about neighborhoods is strongly colored by emotion and implicit bias and constrained by time pressure. Information channels may reinforce prior biases or introduce new but often unspoken biases of their own. While the ways individuals conduct house searches and evaluate alternative neighborhood options, particularly since the explosion of internet house and neighborhood information searches, have not been extensively studied, some key dynamics of the process can be described.
Websites such as Zillow and Realtor.com have broadened the search process, but most home searches still rely heavily on informal networks, including the process by which they select the real estate agent through whom they ultimately buy their home.33 Most white buyers get their information from other white people, and most Black buyers get their information from other Black people. As Marie Krysan found, white buyers almost universally work with white real estate agents, and the great majority of Black buyers work with Black real estate agents.34 Over half of the buyers found their real estate agents through social networks. Once a buyer has selected a real estate agent, that agent subsequently becomes the buyer’s principal source of information.
Because so much of the home-buying process is grounded in buyers’ perceptions and mediated through the selective channel’s buyers use to obtain the information that drives those perceptions, it is hardly surprising that neighborhood marketing, where neighborhoods use websites, social media, and other tools to increase potential buyers’ awareness of the neighborhood and present neighborhood information in a positive light, has become widespread. This is particularly true of urban neighborhoods, where all but the strongest neighborhoods are likely to suffer from an implicit suburban bias with respect to both perceptions and information flow.
A good example of such efforts is that of the Grandmont Rosedale Development Corporation in Detroit. If a prospective buyer has heard of the neighborhood and turned to the web to find more information, the corporation’s website is the first one that appears in a Google search of “Grandmont-Rosedale Detroit.” The home page, which appears when one clicks on that listing, makes an immediate appeal (figure 6.3).
FIGURE 6.3. Home page of the Grandmont Rosedale Development Corporation website
The City of Baltimore along with local foundations and corporations has created a nonprofit entity called the Live Baltimore Home Center to market the city’s neighborhoods to both home buyers and renters.35 The organization, which is professionally staffed and maintains a storefront in a prime downtown location, pursues an impressive array of activities to connect people to Baltimore’s neighborhoods and help them become homeowners, including promoting the availability of mortgages, down payment assistance, and other support.36
Information combined with previously held values and biases drives neighborhood perceptions, perceptions drive neighborhood reputations, and to a large degree reputations drive markets. Perceptions, reputations, and markets can change relatively quickly, however, when new information begins to circulate through the system, supplanting previous information. A previously shunned neighborhood can become desirable, while a previously well-regarded neighborhood can come to be seen as a place to avoid, although the mechanisms by which this happens are not fully understood. The role of changed neighborhood narratives, which can go viral at least within a community or region, is likely to be particularly important.37
Quantifying Neighborhood Markets
The foregoing discussion was qualitative, focusing on the behavior and perceptions of the participants in the residential home-buying market. Those behaviors and perceptions drive outcomes that can be used to measure the market strength or weakness of any neighborhood. Three key variables are the most important: home sales prices, home sales volume, and distribution of sales between home buyers and investors. Each of these three variables, which correlate strongly with one another, says something about the character of the neighborhood housing market. Combined, they add up to a meaningful picture of the market.
The significance of sales prices is intuitively obvious. As a general rule, the stronger the neighborhood’s market, other things being equal, the higher the price the houses in the neighborhood will command.38 If that price, however, is driven by speculation rather than reasoned home-buying decisions or if, despite high prices, the number of sales is too few to absorb the available housing supply, it may have different meanings than when conditions are otherwise. As a general rule, however, high sales prices correlate positively with sales volumes and negatively with the percentage of sales to investor buyers.
While most people understand that if prices are too high or rise too quickly that can be problematic for households that are priced out of the market, it is not as widely understood that prices being too low is also a problem. What “too low” means may depend on the context. As a general proposition, prices are too low if they are significantly below replacement or restoration cost, that is, the cost to either construct a similar house de novo or restore a vacant dilapidated house to sound, livable condition. Where prices are below restoration cost, the gap between the two is often referred to as the “market gap” or in some cases the “appraisal gap.” In essence, what this means is that if a derelict, abandoned house in a neighborhood would cost $90,000 to restore to sound, livable condition but its market value restored would only be $60,000, that house has a market gap of $30,000.
The market gap discourages contractors or developers from acquiring and restoring vacant properties or building infill houses on vacant lots and also discourages property owners from investing in upgrading or renovating occupied properties without scarce public subsidies. Thus, the market gap not only hastens deterioration of the existing housing stock but also, in the absence of expensive public intervention, can lead to growing numbers of vacant abandoned properties, undermining neighborhood property values and quality of life.39
Moreover, low prices below replacement cost make little or no contribution to increasing affordability for lower-income home buyers and for renters. Almost any family with enough stable income to consider homeownership can afford a house at or above the replacement cost in many urban neighborhoods outside hot market cities. Given mortgage interest rates in effect in 2021 and typical property tax rates, a family earning as little as $30,000 can afford to buy a house priced at or above $120,000, while few households earning less than $30,000 are credible candidates for homeownership. While this picture has shifted somewhat since the run-up in house prices that began in 2020, and the sharp increase in mortgage interest rates more recently, it is still largely true.
While in the weakest markets house prices can drop to where they are little more than the transaction costs, rents do not behave similarly. Landlords need to cover operating costs, taxes, insurance, reserves, and a reasonable return on their investment. If they cannot rent their properties for whatever amount that might be, rather than reduce the rents, which would result in an ongoing loss of income, they are likely to abandon the properties.40 Extremely low sales prices in distressed neighborhoods, rather than leading to lower rents, often have a counterproductive effect on landlord behavior. Realizing that by cutting costs to maximize net cash flow they can generate enough income to show a profit on their initial investment in a few years even if the property is worthless by that point, unscrupulous landlords milk the property, often walking away in the end.41
Sales volume, seen as a ratio between the number of properties on the market at a given point or over a given period and the number actually purchased, may be even more important.42 Since the actual number on the market is difficult to establish, it is much simpler to use a well-established real estate rule of thumb that annual turnover in the residential market under normal market conditions is typically around 7 percent of the housing stock.43 Annual turnover in the existing home market from 1999 through 2015, except for a brief period from 2003 to 2005 when the market badly overheated, has consistently remained between 5 percent and 9 percent.44 Sales volume, understood this way, is a more meaningful measure of market activity than the popular “days on market” metric used by the real estate industry.
An annual sales volume of 5 to 9 percent therefore is a proxy for a healthy turnover rate, that is, a rate at which the number of new home buyers is sufficient to replace the number of homeowners whose homes come on the market during the year. We call this the “replacement range.” If the sales volume is significantly below that range, it is likely that there are not enough buyers to absorb the supply. That condition at a minimum impairs homeowners’ mobility and, if combined with house prices below restoration cost, is likely to trigger property disinvestment and abandonment.45
An area with sales volumes within the replacement range is also likely to have sales prices above restoration cost, as the relationship between the two measures is close. Figure 6.4 shows that relationship by census tract in Baltimore. Of fifty-eight census tracts in the lowest two sales price quintiles in the city, from 2016 to 2018 only three had average sales volumes above the minimum replacement range level, and twenty-five had sales volumes below 2 percent, suggesting that the probability of a house coming on the market in those census tracts finding a buyer might be less than the probability of the house ending up abandoned. In chapter 12 we discuss how the phenomenon of low demand, as illustrated by sales volumes below the replacement rate, is an important factor in the post–Great Recession decline of urban Black middle neighborhoods.
FIGURE 6.4. The linear relationship between sales volume and median sales price by census tract in Baltimore, 2018
In contrast to the first two measures in figure 6.4, where reasonably accurate data can be obtained from public records in most US cities, few public agencies track whether the buyer is planning to live in the house or not, and if they did, there is no reason to believe that the data would be reliable. Estimating the percentage of investor buyers relies on using one of a number of proxies, of which the best is to compare the address of the property in the property records with the address to which the property tax bills are sent, the inference being that where they are the same the owner lives in the home.46 CoreLogic assumes that absentee buyers are those where the zip code of the address to which the tax bills are sent is different from that of the property, which most probably understates the percentage of absentee buyers in low-value areas, since many small mom-and-pop investors live close to the properties they buy.47
While a home buyer’s decision to buy reflects a long-term psychological as well as financial commitment to the neighborhood, an investor’s decision is a short-term purely financial one; that is, “will I make enough money from this property, either from cash flow or capital gain on resale, to justify the purchase?” Thus, a high home buyer share is a signal of market strength as distinct from exploitative or extractive buying. As is true of sales volumes, the percentage of investors in the market is strongly related to sales price except that the relationship is an inverse one, as shown in figure 6.5. Although the overall relationship is strong, there is much more variability on this measure at the lower end of the market than is true of sales volumes, suggesting that some low-priced neighborhoods may still be seeing some not insignificant home buyer activity.
FIGURE 6.5. The inverse relationship between investor buyer share and median sales price by census tract in Baltimore, 2018
Summing Up
We introduced the idea of neighborhoods as feedback systems in chapter 2. At this point we can expand that discussion by looking at the specific elements in the feedback system that is the neighborhood market and how the interaction of elements in that system leads to market change. The most fundamental condition of neighborhood markets, as is true to varying degrees of all markets, is that they are dynamic. With rare exceptions, which are usually found at the highest and lowest ends of the market, all neighborhood markets change and can do so far more quickly than many neighborhood actors or local governments can anticipate or assimilate. The process of change can be summarized as a process by which information about existing conditions or specific short-term changes alters neighborhood actors’ perceptions, leading to changes in behavior, which in turn change neighborhood market conditions; as conditions change, information about change continues to affect perceptions and behavior in an ongoing feedback loop. This is shown in summary graphic form in figure 6.6.
FIGURE 6.6. Extending the model of neighborhood change
Information flows are the critical element in the feedback system. At any given point, people’s perceptions of the neighborhood are driven by the information they have, accurate or not, about neighborhood conditions. When a specific change takes place in a neighborhood, which can be triggered either by changes in exogenous conditions or by a specific intervention such as the removal of a neighborhood eyesore or the restoration of a neighborhood park, information about that change enters the system, which in turn acts on the perceptions and behaviors of internal (homeowners, tenants, landlords) and external (home buyers, investors, realtors) neighborhood actors. More people may buy homes, prices may rise, and more existing property owners may invest in their properties.
Short-term changes may not lead to ongoing market change. Whether they do depends first, on information about the change entering the system and, second, on how the market actors respond to that information. In practice, it will also depend on the nature of that change and on the way the change interacts with the underlying conditions of the neighborhood where it takes place, a series of complex relationships not shown in figure 6.6, that is already complicated enough. Many changes, including many that some actors hope will lead to systemic change, do not lead to market change. Even if new information enters the system, the salient market actors may simply shrug it off if the information confirms or reinforces their existing perceptions of the neighborhood rather than changing them or if they do not consider the information credible or significant.
Once sustained market change has begun to take place, however, that process creates a series of feedback loops that affect both the behavior and the perceptions of neighborhood actors. That process can take place slowly or quickly. Exogenous factors are as important or more so than endogenous ones in determining the pace of neighborhood change. In cities such as New York and Seattle, both of which are seeing sustained in-migration of high-earning young people and households, once a neighborhood has been characterized as a desirable place for such people to live, market conditions can change dramatically overnight. Conversely, in St. Louis and Cleveland, even though the information message may be identical, change will be far slower because the inflow of people using that information to make market choices is far smaller.
As we explore the many dimensions of neighborhood change that are characteristic of today’s urban and suburban neighborhoods, we will revisit the elements of this feedback system and in the final chapter of this book further deepen our analysis to begin building a more robust theory of neighborhood change.