What Is the Key to Gentrification?

Those neighbors are key to Harlem’s change, according to research from three economists: Veronica Guerrieri, Ronald E. Tarrson Professor of Economics at Chicago Booth; Erik Hurst, V. Duane Rath Professor of Economics and John E. Jeuck Faculty Fellow at Chicago Booth; and Daniel Hartley of the Federal Reserve Bank of Cleveland. As gentrification transforms neighborhoods and cities across the globe, Guerrieri, Hurst, and Hartley’s research suggests a model for how and where this change occurs.

In 1964, University College London sociologist Ruth Glass coined the term gentrification. She meant it derisively, as a process that forces out existing residents to make way for richer ones, creating what she called “upper-class ghettos.” The push and pull of new and old continues, as once-grungy neighborhoods from London’s Peckham to San Francisco’s Mission District are cleaned up and transformed into more expensive habitats for middle- and upper-class residents.

The realtor’s rule of thumb about gentrification is to follow the artists: it is thought that as artists move into cheap lofts and spaces, they improve the neighborhood, and others move in. But artists aside, is there something else driving gentrification?

Where there’s a boom

To find out, Guerrieri, Hurst, and Hartley use data from the S&P/Case-Shiller Home Price Indices, which track housing prices in the United States using several filters, including zip code. The researchers also examined US Census data at the zip-code and census-tract levels, making use of detailed information such as income, poverty rates, and education level.

They gathered data from about 29 metropolitan areas, including 26 cities with at least 10 zip codes and a usable house-price index, so that they could see house-price variation within a sufficient number of neighborhoods in a city or metro area.

To find gentrification, the researchers looked at cities that had, overall, rising real estate prices. They considered cities such as Los Angeles and Miami, which saw real estate prices soar during the 2000–06 real estate boom, fueled by relatively easy credit. They also considered cities such as Akron, Ohio, and Memphis, Tennessee, where prices rose far less.

When a city is doing well, which neighborhoods appreciate the most? Heading into the research, Guerrieri had a theory that prices in the fanciest, most desirable neighborhoods would do best. Those areas are only so big, and buyers sometimes find themselves in bidding wars for properties within the neighborhoods’ borders.

When Guerrieri dug into the data, however, she was surprised to find that neighborhoods with relatively low-priced houses sometimes appreciated faster than those with expensive homes. In New York during the 2000–06 boom, homes in initially low-priced neighborhoods appreciated at roughly twice the rate of homes in more expensive neighborhoods. House prices in poorer areas in San Francisco also rose faster than those in richer neighborhoods. In Chicago, prices rose in tony Lincoln Park—but not as much as they did in some cheaper neighborhoods such as Wicker Park.

The theory: Rich neighbors

Gentrification sent prices soaring in only some, not all, of the cheaper neighborhoods. To determine what up-and-coming neighborhoods have in common, the researchers considered the reasons people like to live where they do. Neighborhoods close to central business districts are appealing because they offer short commutes to work. This reverses a decades-long trend in which many middle-class workers migrated to the suburbs, forgoing proximity to work for the relative quiet away from the city. Neighborhoods with lots of parks are appealing, as well. But the data suggest that neighborhoods that gentrify have a shared common trait: rich neighbors.

The authors surmise this is hardly an accident. They theorize that the gentrification process begins with an unexpected increase in housing demand—perhaps a company relocates and brings jobs, filled by people who want to buy homes and who gravitate toward certain amenities such as low crime rates and good public schools, which are often available in rich neighborhoods. In a model the researchers designed to measure the effects of a housing boom, such “consumption externalities” are important in generating the gentrification process.

But many people can’t afford to rent, much less buy, in the richest neighborhoods. The researchers suggest that if people live close to a rich neighborhood, they may be able to enjoy some or all of the benefits enjoyed by rich residents, without all of the cost. That is why some buyers, unable to afford top-flight areas, look around and settle in neighborhoods nearby that may share some or all of the amenities.

As new residents move onto those nearby blocks, house prices there start to go up. The incomers restore dilapidated houses, and turn old industrial buildings into residences and shops. As the improvements become visible, other similarly affluent households take note and move in, further increasing house prices. The process spreads organically.

To test their theory, the authors looked at a city’s industry composition, knowing that a booming industry can boost both incomes and housing demand. New York has a large number of people working in finance, for example. When the financial industry does well, incomes go up, and financial workers use their incomes to buy new homes.

In a situation such as this, which neighborhoods are more likely to appreciate? The researchers run a regression analysis and find that poor neighborhoods adjacent to rich ones appreciated faster than others. That was true even after controlling for a variety of factors that could have affected growth in house prices, such as a neighborhood’s distance to a central business district, a resident’s average commute times, and an area’s proximity to natural amenities such as lakes, rivers, and oceans.

Take the period between 1980 and 1990. When cities in the sample registered a typical income shock, house prices in poor neighborhoods that were 1 mile away from a rich neighborhood appreciated by 7 percentage points more than the value of homes in otherwise similar poor neighborhoods that were 4 miles away from a rich neighborhood.

Incomes rise, too

Not only did poor neighborhoods on the border of rich neighborhoods experience rapid house-price growth, these formerly poor areas also experienced a more dramatic rise in income and educational attainment, and a sharper decline in poverty rates, compared with poor neighborhoods that were farther away. These outcomes could be expected as richer residents move in and poorer residents move out.

In the 1980s, in response to a citywide income shock, the incomes of residents in poor neighborhoods that were just 1 mile away from a rich neighborhood grew by 1.7 percentage points more than those of people living 4 miles from the rich area. This translates into an 11% increase in income for the residents of a gentrifying neighborhood. Likewise, increases in poverty rates were 23% lower, and increases in the fraction of residents with a college degree were 25% higher, in poor neighborhoods that were 1 mile away from a rich neighborhood relative to those 4 miles away.

More confirmation that distance matters: suppose that gentrification is defined as poor neighborhoods where incomes have risen by at least 50%. When the researchers looked at data from the 1980s, they found that a poor neighborhood within a half mile of a rich neighborhood, relative to a poor neighborhood 3 miles away, was 64% more likely to gentrify. During the 1990s, the close-in neighborhood was 97% more likely to gentrify. The farther a neighborhood was from a rich area, the less likely it was to gentrify.

The results suggest that proximity to a rich neighborhood is an important factor in whether certain areas will gentrify. Other factors such as residents’ commute time may matter, too, but proximity remains an important factor even after controlling for the others.

A city with only rich neighborhoods

Other research, including a study by Princeton’s Esteban Rossi-Hansberg, along with Pierre-Daniel G. Sartre and Raymond E. Owens III of the Richmond Fed, has looked at the effect of direct public policies on gentrification. Guerrieri, Hurst, and Hartley focus instead on gentrification that takes shape spontaneously, without government intervention. They call this “endogenous gentrification.”

This endogenous gentrification could be the result of several other trends colliding. In the 1940s, American soldiers returning from World War II settled in suburbs—but more recently, many people, and especially younger ones, are rediscovering cities and choosing to live in urban areas. Moreover, as previous research by Hurst has explored, income inequality has dramatically increased in the United States over three decades.

The combination of a richer group of people migrating to cities contributes to the spread of fixed-up homes and other hallmarks of the rising tide. Back in New York, gentrification has been spreading across the borough of Brooklyn. Large swaths, from Williamsburg to Park Slope, have been transformed, with cupcake shops and stores selling fancy dog treats replacing hair salons and bodegas. In Chicago, guides on tourist boats passing the West Loop neighborhood point to balconies on old cold-storage warehouses as signs that the buildings have been remade into plush condominiums.

The researchers’ findings have implications for developers, investors, city planners, and community activists. While the authors don’t take a view about whether gentrification is good or bad, they see Glass’s original definition play out in their model, as rich households become concentrated together while poor households are pushed to the fringes of the city, where the benefits of living close to a rich neighborhood are weak but housing is relatively cheap. “We show that there exists an equilibrium with full income segregation where the high-income residents are concentrated all together and the low-income residents live at the periphery.”

Guerrieri says that people being displaced now by gentrification may create new neighborhoods in undeveloped areas. In cities with few such undeveloped areas left, however, residents may not find unclaimed territory, and may instead move to suburbs.

Hurst says people with low-wage jobs are increasingly enduring long commutes to get to work. This, he points out, is already happening in a string of US cities. “I have a prediction,” he says. “In 70 years there will not be many poor people left in New York.”