Spring 2000 — Volume 2 Issue 1

Cities and the Reinvestment Wave: Underserved Markets and the Gentrification of Housing Policy

By Elvin K. Wyly and Daniel J. Hammel

For half a century, Americans have tampered with the word "urban," reflecting our long-standing ambivalence toward the city. First we ran away to the suburbs, then we moved on to distant exurbs or brand-new technoburbs wired into the "infoedutainment" economy. But the outward spread of urbanization always generates countervailing pressures to recycle old central-city neighborhoods for the middle and upper classes. The result is a tighter market for affordable rental units in the city, and, sometimes, direct displacement of low- and moderate-income households. Thirty-five years ago, the eminent sociologist Ruth Glass coined the word "gentrification" to describe this process in London's Covent Gardens neighborhood, and the term was soon imported to the United States. Ever since, gentrification has inspired heated debates among American city dwellers, journalists, policy makers, and scholars. Is this the beginning of a sustainable urban revival? What does it mean for low- and moderate-income residents, people of color, and the homeless in city neighborhoods that suddenly become attractive to the middle classes? Should governments encourage the process, regulate it, or both?

Experts have debated these questions since the 1960s, but lost interest after the collapse of red-hot real estate markets in the 1980s. Now, after nearly a decade of economic expansion, residents and policy makers are asking whether gentrification has returned, why it persists, and why it matters. This article describes a research project we designed to answer these questions. Over the last few years we have conducted detailed fieldwork in neighborhoods that suffered disinvestment in the 1950s and 1960s and are now undergoing gentrification. We have completed our studies for eight large cities: Boston, Detroit, Chicago, Milwaukee, Minneapolis-St. Paul, Philadelphia, Seattle, and Washington, DC. Because complex processes such as gentrification are often defined by the eye of the beholder, we devised a set of modeling techniques to link our fieldwork and archive research to census information collected in 1990 (which can only be updated after the 2000 census results are tabulated). This procedure can be tedious, but once it is done we can match our list of gentrified neighborhoods to other data collected annually.

We find that today's urban revival is very different from previous cycles, because gentrification has become tightly linked to housing policy. New methods of financing home purchases, along with regulation and community activism, have funneled a wave of reinvestment into parts of the city that were once ignored by most lending institutions. One unexpected result was to unleash powerful market forces in areas attractive to the upper middle class. In turn, as gentrification transformed these neighborhoods, it became an important factor in its own right. It began to shape the choices available to policy makers working toward other housing goals-such as redeveloping dilapidated housing projects in an age of cutbacks in public assistance to the poor.

The Resurgence of Gentrification
The recession of the early 1990s led many to proclaim the death of gentrification. Widespread evidence now suggests otherwise, but the most vivid signs are anecdotal. A sociologist talks about "turbo-gentrification" in parts of Boston; New York real estate brokers speak of "helium-filled" markets for condos and co-ops; in a few cities the expansion of Internet businesses and e-commerce propels a "dot com­modification" of real estate inflation, as newly rich entrepreneurs and professionals compete ferociously for homes in the right neighborhoods. Community activists in New York decry the "Disneyfication" of the place, while some activists in Oakland, California express frustration with their mayor's (Jerry Brown's) growing ties to development interests by lamenting a "Jerryfication" process as growth pressures spill across the bay from San Francisco.

All of these anecdotes are persuasive, but how much investment is there? We use the most conservative measure available to answer this question: conventional mortgage loans made to home buyers seeking properties in gentrified neighborhoods. (This information is available from reports filed by mortgage lenders under requirements of the Home Mortgage Disclosure Act, or HMDA.) We found that between 1992 and 1997, total mortgage lending to "core" gentrified neighborhoods in the case-study cities increased from $358 million to $763 million, while investment in surrounding "fringe" gentrified neighborhoods jumped from $176 million to $383 million. These figures remain small compared with suburban investment, but the growth rates confirm a dramatic rebound in parts of the inner city. In the boom of the mid-1990s, gentrified neighborhoods attracted mortgage capital at a rate outpacing the suburbs by a factor of 2.3. Today's home buyers and lending institutions are willing to make substantial long-term investments in parts of the city that were written off as hopeless only a generation ago. Why?

As with so many other urban questions, getting a simple answer would require a one-armed social scientist. On the one hand, there are broad cultural explanations, such as the growth in so-called "nontraditional" households and new classes of professionals searching for a vibrant residential experience. On the other hand, the economics of urban housing markets create enormous profit potential in low-income residential areas close to expanding downtown office districts. For years, experts have debated the relative importance of economics and culture, and there is still no clear consensus. But most overlook the role of housing policy. We believe that changes in the way homes are financed have unleashed strong market forces in certain parts of cities, creating a fundamentally new form of neighborhood change when the economy began to rebound in the 1990s. Many of the results have been unintentional, and it remains to be seen how many places will be affected. But these forces are so powerful that they have spilled out beyond the boundaries of trendy city neighborhoods to engulf some of the public housing landscapes created by previous generations of public policy.

Housing Finance and the Inner City
The most important elements of the American housing finance system-particularly the long-term, amortized mortgage loan-evolved from conventions laid down during the Great Depression, when policy makers sought to revive housing markets and construction activity. Urbanists agree that key aspects of this evolving system helped accelerate the problems of redlining, white flight, and eventual abandonment. The spread of gentrification during the 1970s attracted attention in part because it was so unexpected in the face of such powerful decentralizing forces. Did middle-class urbanites and maverick developers see something in the inner city that had been overlooked by everyone else?

Through the 1970s and 1980s, independent developers, city governments, and so-called "urban pioneers" saw significant potential in older urban neighborhoods, but they got little help from mainstream institutions. That began to change toward the end of the 1980s when several trends intersected. Developers, lenders, and local officials coordinated large, mixed-use redevelopment schemes as part of the boom in downtown office construction. Meanwhile, activists were using the Community Reinvestment Act of 1977 to challenge bankers who were redlining poor and minority neighborhoods.

When the 1980s boom collapsed, provisions of the savings and loan bailout strengthened oversight of the lending industry (as well as the dominant secondary market mortgage purchasers, Fannie Mae and Freddie Mac), and subsequent efforts of the first Clinton administration created a more comprehensive system to enforce fair lending laws that had languished on the books since the 1960s. At the same time, intense competition and consolidation forced lenders to automate and standardize more of their underwriting to increase efficiency, and the dramatic growth of the secondary market allowed lenders to shift some of the risks of mortgages (default, delinquency, and prepayment) to investors. Lenders relaxed down payment and debt requirements as they searched for new borrowers among "nontraditional" populations (low- and moderate-income households, minorities, single mothers, recent immigrants, and even Native Americans). Lenders and regulators talked less and less about equity, justice, and fair lending, and began singing the praises of "underserved" and "untapped" markets. Homeownership became the preferred solution to a wide spectrum of urban and social problems.

All these shifts in market forces set the stage for a new kind of neighborhood change when the economy took off. The last decade has been a stark contrast to previous generations, when lenders and investors created self-fulfilling prophecies of decay by starving older urban neighborhoods of necessary capital. This time around, lenders, investors, and public officials found common ground in "greenlining." The results have provided important benefits for some minority home buyers, low-income communities, and city governments. But these changes have also unleashed powerful gentrification forces in urban neighborhoods that appeal to the middle and upper classes.

How much have these policies mattered? To answer this question we adapted a technique commonly used to study racial discrimination in mortgage markets. Because lenders are required to report certain characteristics of anyone who applies for a mortgage and the action taken on each application, the HMDA files allow us to simulate lenders' decision-making processes. This procedure involves using as many relevant borrower characteristics as we can to predict the likelihood that a lender will deny an application. We developed a model of this type for all 735,000 applications for conventional home purchase loans in our case study cities in 1996 and 1997, including a detailed set of controls to account for the different financial profiles of applicants. The controls include standard items such as income, loan amount requested, and similar indicators, but we also incorporate a variable that we designed to factor in loan denials because of poor credit history. This credit history estimate or "instrumental variable" is based on a list of reasons that lenders may (optionally) report when they reject an application, so it is not a perfect measure; in fact, it may capture discriminatory behavior if lenders try to mask their bias by reporting credit history as a reason for denial.

After factoring in this set of controls, it was possible to code variables for property location to find out whether mortgages in gentrified areas identified in our field surveys are viewed as more or less risky than otherwise identical loans elsewhere. In other words, are gentrified areas being redlined or greenlined?

The results are striking. For simplicity this diagram only shows the effects of institutional, geographical, and racial factors on loan denial-after accounting for all other relevant borrower characteristics. Different kinds of lenders serve different markets, with depositories (banks, thrifts, credit unions) less likely to reject applicants than independent mortgage companies. And it is clear that metropolitan housing markets vary widely: An applicant in Detroit is almost twice as likely to be denied as an otherwise identical borrower in Chicago. But it is the right-hand side of the diagram that focuses directly on our hypothesis that once-redlined gentrified areas are now being greenlined. Even after accounting for all other factors, loans for homes in core gentrified areas are only 0.72 times as likely to be denied as identical applications in other neighborhoods; the ratio drops to 0.66 at the advancing frontier of gentrification activity. Although these effects may not seem very large, consider that the reduced likelihood of denial in gentrified areas is more pronounced than the increased likelihood of denial for African Americans and Hispanics. Moreover, core gentrified neighborhoods-defined in our research as areas that were low income before the 1970s but then became "hot" centers of renewal-are now places of racial exclusion: Blacks trying to buy homes in these areas are 1.44 times as likely to be turned down as if they were to apply elsewhere in the metropolitan area. When debating the future of inner cities, policy makers and residents should be as concerned about the consequences of gentrification as they are about racial discrimination in housing and credit markets.

Gentrification and Public Housing
Changes in housing finance have unleashed powerful gentrification forces, but the resurgence of the inner-city land market has become a factor in its own right. In many places, seas of wealth created by 30 years of renewal now surround islands of poverty inscribed during previous eras of public housing construction. By the end of the 1980s, frustrated policy makers were considering all options for the most distressed projects-rehabilitation, demolition and new public housing construction, or dispersal of project residents with Section 8 vouchers or certificates along with market-rate redevelopment of the original site. In the early 1990s, the U.S. Department of Housing and Urban Development (HUD) expanded a small demonstration into the HOPE VI public housing redevelopment program, named after a series of 1980s initiatives called "Homeownership and Opportunity for People Everywhere." The program explicitly encourages privatization, partnerships with developers, and income mixing to remedy the severe isolation of poor residents created by private-market segregation and public housing admissions criteria. Congressional upheaval after the 1994 midterm elections accelerated the shift toward privatization, devolution, and the "reinvention" of government. All of these trends strengthened the links between assisted housing policy and private market activity, as policy makers try to improve the deplorable conditions of the nation's worst housing developments. Yet these laudable goals take place in the context of a troubling contradiction. Gentrification, a complex process that mostly benefits an affluent population and is almost always an exclusive, polarizing force, now frames the choices open to policy makers working to redevelop public housing.

How important are these changes? To find out we examined HOPE VI grant applications filed by public housing authorities (PHAs). HUD offers sizeable grants for creative plans to redevelop distressed public housing projects if the PHA can demonstrate feasibility and can leverage private investment dollars. These plans provide clues to the relationship between the types of redevelopment envisioned and the presence of nearby gentrification identified in the field surveys. Our analysis includes all successful grant applications between 1993 and 1998, encompassing more than $650 million of promised federal investment, or about one-fifth of the national program during these years.

We found that gentrification often helps condition the redevelopment of inner-city housing projects, although there are important exceptions. Of the 10 plans in the case study cities that involve no market-rate redevelopment of the original land parcel, most have no nearby gentrification activity; only two are near gentrified neighborhoods in cities with significant concentrations of renewal (Boston and Philadelphia). Six plans involve explicit provisions for market-rate housing on the original site; four of these are within or immediately adjacent to gentrified neighborhoods, and in every case the plans acknowledge the importance of private-market activity for attracting market-rate residents. In Chicago, the evidence is particularly striking: Of the four HOPE VI plans across the city, three envision income mixing of some sort, while the fourth, deep in the poor parts of the South Side, calls for remaking the site into a light industrial park. On the North Side, the notorious Cabrini-Green housing projects are almost completely surrounded by upscale residential and retail activity. The Chicago Housing Authority's redevelopment plan was complicated by the federal takeover of the agency in 1995, but the final plan (now under way) involves a net reduction of 79 percent of the public units on site, and an ultimate neighborhood mix of 30 percent public housing, 20 percent housing for moderate-income families, and 50 percent market-rate units. The seas of wealth surrounding one of the nation's most widely known inner-city poverty concentrations have become a critical consideration in policy formulation. And it is not hard to envision that the redevelopment may itself help lubricate the gentrification process. Million-dollar homes are under construction within 300 yards of Cabrini-Green, and there can be no doubt that developers and prospective buyers are fully aware of plans to reinvent the projects at the heart of the neighborhood once called "Little Hell."

Islands of Decay in Seas of Renewal
Gentrification has rebounded after the recession of the early 1990s. But in contrast with previous years, housing policy is much more important this time around. Trends in housing finance-easier credit terms, community reinvestment efforts, and the ease with which lenders can shift risks to the secondary market-have unleashed powerful gentrification forces. On the other hand, market demand in some parts of the inner city has grown so strongly that gentrification now surrounds the housing projects created by a previous generation of public policy. In these settings, gentrification is no longer the trivial case of "islands of renewal in seas of decay" (to use the words of a famous geographer writing in 1985), but is instead a crucial consideration in attempts to revitalize public housing. In scores of neighborhoods across the country, policy makers, residents, and developers are debating what to do about these "islands of decay in seas of renewal." For its advocates and detractors alike, gentrification will continue to have considerable significance for the future of America's inner cities.

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Elvin K. Wyly is Assistant Professor in the Department of Geography and the Center for Urban Policy Research at Rutgers University, and Daniel J. Hammel is Assistant Professor of Geography at Illinois State University. For a deeper discussion of this topic and more information on their methodology, see Wyly and Hammel's article in Housing Policy Debate Volume 10, Issue 4.