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Working Paper

Endogenous Gentrification and Housing-Price Dynamics

In this paper, we begin by documenting substantial variation in house-price growth across neighborhoods within a city during citywide housing price booms. We then present a model which links house-price movements across neighborhoods within a city and the gentrification of those neighborhoods in response to a citywide housing-demand shock. A key ingredient in our model is a positive neighborhood externality: individuals like to live next to richer neighbors. This generates an equilibrium where households segregate based upon their income. In response to a citywide demand shock, higher-income residents will choose to expand their housing by migrating into the poorer neighborhoods that directly abut the initial richer neighborhoods. The in-migration of the richer residents into these border neighborhoods will bid up prices in those neighborhoods, causing the original poorer residents to migrate out. We refer to this process as "endogenous gentrification." Using a variety of data sets and using Bartik variation across cities to identify city-level housing demand shocks, we find strong empirical support for the model’s predictions.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Guerrieri, Veronica, Daniel A. Hartley, and Erik Hurst. 2012. “Endogenous Gentrification and Housing-Price Dynamics.” Federal Reserve Bank of Cleveland, Working Paper No. 10-08R1.