An Equilibrium Analysis of Low-income Property Development
Introduction:
In this paper, we provide an analysis of the costs and benefits of affordable housing construction and Low Income property development to surrounding neighborhood residents and how they vary across demographically different neighborhoods.
We nonparametrically estimate spill overs of properties financed by the Low Income Housing Tax Credit (LIHTC) onto neighborhood residents by developing a new difference-in-differences style estimator. LIHTC development revitalizes low-income neighborhoods, increasing house prices by 6.5%, lowering crime rates, and attracting racially and income diverse populations. LIHTC development in higher-income areas causes house price declines of 2.5% and attracts lower-income households. Linking these price effects to a hedonic model of preferences, LIHTC developments in low-income areas cause aggregate welfare benefits of $116 million. Affordable housing development acts like a place-based policy and can revitalize low-income communities.
What is Low-Income Housing Tax Credit (LIHTC)?
We study the neighborhood impacts of multifamily housing developments funded through the Low-Income Housing Tax Credit (LIHTC). Established in 1986, this program has become an integral component of federal housing policy, funding 21 percent of all multifamily developments over the period 1987-2008.
Looking forward, with the construction of publicly run housing projects expected to continue to decline, the LIHTC program is likely to remain one of the main federal government initiatives designed to ensure access to affordable housing by low income households. We combine data on the location and funding dates for all LIHTC funded projects, housing transaction data from 129 counties, and home buyer race and income data to estimate the effects of LIHTC construction on the surrounding neighborhood.
Our estimates show that the impact of affordable housing construction has dramatically different effects on surrounding property values based on whether the affordable housing was built in a relatively richer or poorer neighborhood and whether the neighborhood has a high share of minority residents.
The Low Income Housing Tax Credit:
Since its inception in 1986, the Low Income Housing Tax Credit Program has been an integral component in fostering the development of multifamily housing throughout the United States. With an annual tax credit valued at over 8 billion dollars, the program funded 21 percent of all multifamily developments between the years 1987-2008.
Comparison to Ring Method:
Our nonparametric estimator gives a lot of detail into the shape and intensity of the local house price responses. However, this does come at a slight cost of computational complexity. Previous methods using this style of identification strategy have employed the ring method. While this method is simple, it can be quite underpowered. This is due to a severe missing data problem where data is dropped when either the inner or outer ring does not have a transaction in a given year.
Furthermore, there can be substantial time-invariant geographic house price variation within the rings (e.g. in the north vs the south) which the ring method does not control for. Finally, our hedonic model requires the actual gradient, which the ring method does not directly provide.
Non-Parametric Differences-in-Differences Estimation:
Our first goal is to study the reduced-form effect of LIHTC development on local house prices. Our research design to identify the causal effects of LIHTC development on local house prices will use a non-parametric spatial difference in differences strategy. Intuitively, we will compare house prices very close to the LIHTC site before and after LIHTC development versus house price trends slightly further away from the LIHTC site. This allows us to recover the house price impacts of LIHTC developments and how they vary with distance from the LIHTC site and time since development.
Conclusion:
In this paper, we study multifamily housing developments funded through the Low Income Housing Tax Credit (LIHTC) to quantify the costs and benefits of affordable housing development on surrounding neighborhoods. Leveraging new econometric methods, we find that LIHTC construction has heterogeneous effects on local house prices based on neighborhood characteristics.
In lower income areas, house prices appreciate substantially over the long-run in response to the introduction of affordable housing projects. Areas with a high minority share also experience significant price appreciation when a LIHTC development is built. On the other hand, prices in areas with higher median incomes and low minority shares tend to depreciate over the long-run.
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