Article first published online: July 14, 2015
Matthew Freedman, Associate Professor of Economics, Drexel University and Tamara McGavock, Ph.D. candidate, economics, Cornell University
What was the genesis of the idea for your research/paper?
We were motivated by the substantial debate surrounding the merits of housing production programs, and in particular housing production programs that encourage new development in low-income communities. On the one hand, subsidized development might provide better housing options to disadvantaged populations and help to revitalize blighted communities. On the other hand, it could merely serve to concentrate poverty in certain neighborhoods and worsen residential segregation. The extent to which our current housing production programs largely do one or the other is of critical importance from a policy perspective.
The federal Low-Income Housing Tax Credit (LIHTC) is not only the largest rental housing production program in history, but it also has several features that lend itself to a close analysis of its impacts on communities. We exploited some of these features to get leverage on the basic question of how the LIHTC, a prime example of a new generation of housing production programs that lean heavily on private and non-profit organizations, affected neighborhood conditions over the past decade. Inspired by a growing body of research suggesting that, in addition to average income levels, the distribution of income within neighborhoods can affect adult and child outcomes, we explored the effects of LIHTC projects not only on poverty concentration, but also on neighborhood inequality and residential segregation.
What is the main conclusion that becomes evident from your research? (Or, what is your main takeaway?)
We found that housing investment subsidized by the Low-Income Housing Tax Credit increases the fraction of people in poverty and decreases median income levels in recipient communities. However, the effects are very small. Moreover, they are driven by an influx of households eligible to reside in newly constructed subsidized units as opposed to an outflow of higher-income households. Our results suggest that, on average, housing development under the LIHTC does not render neighborhoods less attractive to more affluent residents, as some critics of the program fear.
What are some of the more interesting or surprising findings/conclusions did you find in the process of bringing this together?
We encountered a number of interesting and surprising things as we worked on this paper. First, in addition to examining how subsidized housing development affects neighborhood poverty concentration and inequality, we also explored the extent to which LIHTC development displaced, or “crowded out,” private unsubsidized housing development. We found that a sizable fraction – between 30 and 50 percent – of rental housing development spurred by the program is offset by a reduction in the number of new unsubsidized rental units in the same neighborhood.
Second, we found evidence that housing developers that use the LIHTC program tend to favor neighborhoods that are otherwise improving. The tendency of developers to site new housing in communities that are already on an upward trajectory will bias naïve estimates of the effects of LIHTC-subsidized housing investment on communities, making it appear as if new development improved neighborhood conditions while in reality neighborhood conditions would have improved regardless. Indeed, estimates of the effects of subsidized developments that do not account for this endogeneity problem suggest that new developments reduce poverty rates and increase income levels in recipient communities. When we addressed the endogeneity problem by exploiting institutional features of the LIHTC program, the signs on our estimates flipped, indicating the program has negative, albeit very small, effects on neighborhood income levels.
Finally, we expected that there might be very different effects of subsidized housing developments in neighborhoods that were gentrifying relative to neighborhoods that were stable or declining. We examined this by identifying neighborhoods with stronger vs. weaker past house price appreciation and separately estimating the effects of subsidized development in each group. We found that the negative effects of subsidized developments were more pronounced in gentrifying neighborhoods, although the differences in effects between gentrifying and non-gentrifying neighborhoods were not large.
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Matthew Freedman is an Associate Professor of Economics at Drexel University. His research interests lie mainly in the areas of labor economics, public finance, and urban economics. His current work examines how federal, state, and local housing and economic development programs affect neighborhoods.
His research also explores segregation within cities and the local labor, capital, and housing market dynamics that give rise to differential patterns of inequality across metropolitan areas. Freedman was previously an Associate Professor of Economics at Cornell University and has held visiting positions at the Wharton School and Princeton University. Freedman earned his Ph.D. in economics from the University of Maryland-College Park.
For more information, see http://works.bepress.com/matthew_freedman/.
Tamara McGavock is a Ph.D. candidate in economics at Cornell University. Her research lies at the intersection of development and labor economics, with particular focus on intra-household and gender issues. She uses quasi-experimental techniques to study the choices households make with respect to household formation, migration, and intra-household resource allocation, the extent to which these choices are affected by gender, and the extent to which they affect outcomes such as educational attainment, health, fertility, and employment measures.
Recent applications include sibling inequality in Indonesia and whether they compensate one another as adults and child marriage in Ethiopia. She received a B.A. in economics from Wellesley College (2008) and expects to complete her graduate work in 2016 under the direction of Francine Blau and Kaushik Basu.
For more information, see https://sites.google.com/site/tmcgavock/.