"The Social Costs of Concentrated Poverty: Externalities to Neighboring Households and Property Owners and the Dynamics of Decline"

“The Social Costs of Concentrated Poverty: Externalities to Neighboring Households and Property Owners and the Dynamics of Decline” We investigate theoretically and empirically two interrelated potential consequences of the spatial concentration of poverty: negative externalities to proximate residents (stimulation of socially harmful behaviors like crime) and property owners (reduced maintenance and, in the extreme, abandonment). Inasmuch as these consequences are capitalized into property values, we use changes in these values to make a rough estimate of the aggregate dollar costs to American society of the aforementioned externalities. We demonstrate the conceptual importance of threshold effects in the analysis of the potential costs of concentrated poverty to the society as a whole. We develop three theoretical models of the consequences of concentrated poverty: (1) micro-level, explaining how/why such would affect household behavior; (2) micro-level, explaining how/why such would affect property owner behavior; (3) meso-level, explaining how concentrated poverty, household behaviors and owner behaviors interrelate when aggregated to the neighborhood level in a mutually causal way. We specify and estimate two empirical models that show in reduced form the changes in property values and rents that transpire from changes in neighborhood poverty rates, both directly and indirectly through impacts on housing upkeep and crime. The first is a hedonic model of individual home sales in Cleveland from 1993-1997, and uses lagged annual observations of public assistance rates in the surrounding census tracts as a way of confronting the issue of simultaneity between values and poverty. The second models median values and rents in all census tracts in the largest 100 metropolitan areas from 1990-2000, and instruments for neighborhood poverty rates. Results from both models are remarkably similar, and show that there is no substantial relationship between neighborhood poverty changes and property values or rents when poverty rates stay below ten (10) percent. By contrast, marginal increases in poverty when neighborhood poverty rates are in the range of 10 to 20 percent results in dramatic declines in value and rent, strongly suggesting a threshold corresponding to the theoretical prediction. Using parameters from the second model, we simulate how property values and rents would have changed in the aggregate for our 100 largest metropolitan areas had populations been redistributed such that: (1) all census tracts in 1990 exceeding 20 percent poverty had their rate reduced to 20 percent by 2000, and (2) only the lowestpoverty tracts were allocated additional poor populations, with each increasing their poverty rate by five percentage points. We find in this thought experiment that owneroccupied property values would have risen $421 billion (13%) and monthly rents would have risen $400 million (4%) in aggregate, ceteris paribus.