Has Falling Crime Driven New York City's Real Estate Boom?
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Schwartz.qxd 10/23/03 11:45 AM Page 101 Journal of Housing Research · Volume 14, Issue 1 101 © Fannie Mae Foundation 2003. All Rights Reserved. 101 Has Falling Crime Driven New York City’s Real Estate Boom? Amy Ellen Schwartz, Scott Susin, and Ioan Voicu* Abstract We investigate whether falling crime has driven New York City’s post-1994 real estate boom, as media reports suggest. We address this by decomposing trends in the city’s property values from 1988 to 1998 into components due to crime, the city’s investment in subsidized low-income housing, the quality of public schools, and other factors. We use rich data and employ both hedonic and repeat-sales house price models, which allow us to control for unobservable neighborhood and building-specific effects. We find that the popular story touting the overwhelming importance of crime rates has some truth to it. Falling crime rates are responsible for about a third of the post-1994 boom in property values. However, this story is incomplete because it ignores the revitalization of New York City’s poorer communities and the large role that housing subsidies played in mitigating the earlier bust. Keywords: Crime; Hedonic method; House prices; Repeat-sales method Introduction The fall in crime in New York City over the past decade has been dramatic and has attracted national attention. Over the 1988 to 1998 period examined in this study, the murder rate fell by 69 percent, the violent crime rate fell by 53 percent, and property crimes dropped by 56 percent.1 Falling crime spurred increased tourism and hotel occupancy, record-breaking numbers of applications to local colleges, and increased property values, according to media reports. By 1997, New York was ranked by a business magazine as the best city in the coun- try to locate a business, and in a national poll it was ranked as the most desirable city in which to live. One national magazine announced in 1997 that New York was “roaring back,” label- ing it, “Comeback City” (Marks 1997).2 In this study, we examine this popular theory for New York City’s comeback and find, perhaps unsurprisingly, that press reports of a boom during the late 1990s are somewhat exaggerated. * Amy Ellen Schwartz is Associate Professor of Public Policy at the Wagner Graduate School of Public Service at New York University. Scott Susin is a Research Fellow at the U.S. Census Bureau and a former Furman Fellow at the New York University School of Law Center for Real Estate and Urban Policy. Ioan Voicu is the Furman Fellow at the Fur- man Center for Real Estate and Urban Policy at New York University. The opinions and conclusions expressed here are those of the authors alone and not of the Census Bureau or any other organization. The authors thank Keri-Nicole Dillman, Ingrid Gould Ellen, Michael Schill, and Isaac Meg- bolugbe for their insight and assistance. They also thank Jerilyn Perine, Ilene Popkin, Harold Shultz, Calvin Parker, and Harry Denny of the New York City Department of Housing Preservation and Development, Howard Safir of the New York City Police Department, and Richard Roberts, for providing the data necessary to complete this research. 1 Changes in crime rates are the authors’ calculations based on data from the New York City Police Department. 2 Karmen (2000, 8–10) lists these and a number of other media claims in the late 1990s about the positive effects of crime reductions. Schwartz.qxd 10/23/03 11:45 AM Page 102 102 Amy Ellen Schwartz, Scott Susin, and Ioan Voicu Around 1988, housing prices in New York City peaked. They fell 30 percent by 1994, when the city’s housing boom began. Property values then proceeded to rise again, recovering 17.5 per- centage points by 1998. This increase in the latter half of the 1990s seems relatively modest compared with the boom touted in popular discussion. One explanation might be that because our analysis tracks crime only through 1998, we miss the property value increase that occurred from 1999 until the terrorist attacks of September 11, 2001. However, as noted above, notions that New York was “roaring back” were well-established by 1997. We suspect an alternative explanation—that reports in the popular press conflated New York City with its wealthiest component, core Manhattan, which experienced faster increases than most of the city. At the same time, there is no doubt that other parts of the city did quite well in the 1990s. We document that New York’s boom was strongest in both its wealthiest and its poor- est areas, but it was weakest in the middle-income sections of the outer boroughs (Brooklyn, Queens, Staten Island, and the Bronx). Were rising prices driven by falling crime? We address this question by decomposing trends in New York City’s property values during 1988 to 1998 into components due to crime, the city’s investment in subsidized low-income housing, the quality of public schools, and other factors. To do so, we use an extraordinarily rich data set that includes detailed information on proper- ties sold in New York City, including actual transaction prices (rather than reported or assessed values), as well as information on crime, schools, and housing investment between 1988 and 1998. As in much of the previous research into property values and public services, we use a hedonic price model to control for numerous measured characteristics of housing and neigh- borhoods, and we use a fixed-effects specification to capture unmeasured, time-invariant, idiosyncratic characteristics of neighborhoods. Notice that the success of such analyses hinges on the quality and availability of data on hous- ing characteristics; therefore, hedonic analyses traditionally are bedeviled by omitted variable bias. Thus, we also investigate the relationship between property values and public amenities using a repeat-sales methodology, in which we control for unmeasured characteristics of hous- ing, albeit at the cost of limiting the sample to buildings that sold more than once. For the purposes of comparison with other research, we also estimate simpler cross-section models. To preview the results, we find that falling crime rates are responsible for six percentage points of the overall 17.5 percent increase in property values that New York City experienced from 1994 to 1998. Education quality and subsidized housing investment are about equally responsible for another seven percentage points of the increase (3.8 and 3.2 percentage points, respectively). The final 4.5 percentage points of the increase are not well explained by our model. During the earlier bust, crime and education quality played a relatively small role, largely because there was no strong trend. Crime rates peaked in the middle of the housing bust and only began their rapid decline after 1993. Subsidized housing investment, however, seems to have played a large role. In the absence of public investment in housing, property values would have fallen by 17 percentage points more than their actual 30 percent drop. So, the popular story touting the overwhelming importance of crime rates has some truth to it. Falling crime rates are responsible for about a third of the post-1994 boom in property values. This story is incomplete, however. Specifically, it ignores the revitalization of New York City’s poorer communities and the large role housing subsidies played in mitigating the earlier bust. Fannie Mae Foundation Schwartz.qxd 10/23/03 11:45 AM Page 103 Has Falling Crime Driven New York City’s Real Estate Boom? 103 This article is organized as follows. The next section reviews the literature on property val- ues and crime, government investment in housing, and public schools. The following section describes the data and variables used for the study and presents some summary statistics. The third section presents the methodology, followed by a discussion of the results. A final sec- tion presents conclusions. Literature Review Although many studies have examined the relationship between property values and local public services, and, specifically, the effect of changes in crime, public housing investment, and public education on property values, some studies are particularly relevant to our research. Crime A number of studies have examined the effect of crime (particularly crime rates) on property values. Unsurprisingly, this research typically concludes that crime has a negative effect on property values. As an example, Thaler (1978) found an elasticity of home values with respect to crime rates of –0.07, whereas Haurin and Brasington (1996) found an elasticity of –0.05. Most of these studies used cross-sectional data on self-reported home values from the decen- nial census (e.g., Burnell 1988; Gray and Joelson 1979; Hellman and Naroff 1979; Naroff, Hellman, and Skinner 1980; Rizzo 1979). A notable exception is Buck and colleagues (Buck et al. 1991; Buck, Hakim, and Spiegel 1993), who used 15-year panel data on towns near Atlantic City, New Jersey. Unfortunately, they based their analysis on assessed values rather than transaction prices, and they measured public services at the municipality level rather than the neighborhood level. Although Thaler (1978) and Lynch and Rasmussen (2001) used actual home sales data, both studies are cross-sectional. Thaler’s research is based on an extremely small sample (398 house sales), and Lynch and Rasmussen measured crime as total crimes in a police precinct rather than per capita. A common problem with this literature is that omitted variable bias is likely to be present, given the quite limited sets of control vari- ables (especially those measuring the quality of public services and neighborhoods). It is likely that such characteristics—notably the presence of dilapidated housing and school quality— will be correlated with both home prices and crime.3 Government Investments in Housing Studies of the relationship between government investments in housing and neighborhood property values have yielded mixed results.