Working Paper: CEPR ID: DP8300
Authors: Amine Ouazad; Romain Rancière
Abstract: How do credit standards on the mortgage market affect neighbourhood choice and the resulting level of urban segregation? To answer this question, we first develop a model of neighbourhood choice with credit constraints. The model shows that a relaxation of credit standards can either increase or decrease segregation, depending on racial income gaps and on races' preferences for neighbourhoods. We then estimate the effect of the relaxation of credit standards that accompanied the 1995-2006 mortgage credit boom on the level of school segregation. Census tract racial composition is strongly correlated with the racial composition of the 10 closest schools in the cross section. Matching a national data set of mortgage originations with annual racial demographics of each of the public schools in the United States from 1995 to 2006, we find that the relaxation of credit standards has caused an increase in the segregation of blacks through a lower exposure of blacks to Hispanics and whites.
Keywords: lending standards; mortgage; segregation
JEL Codes: H0; J15; R2; R3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mortgage credit boom from 1995 to 2007 (G21) | urban and school racial segregation (R23) |
| higher leverage (G32) | increased segregation among African American students (I24) |
| higher leverage (G32) | increased segregation among Hispanic students (I24) |
| increase in median loan-to-income ratio from twice to three times borrower's income (G21) | 22 percentage point increase in isolation of African American students (I24) |
| increase in median loan-to-income ratio from twice to three times borrower's income (G21) | 17 percentage point increase in isolation of Hispanic students (I24) |
| if whites value public goods more than minorities (H40) | segregation will increase (J79) |
| if income gap is larger or valuations are similar (G19) | relaxation of lending standards could decrease segregation (R28) |
| increased exposure to Hispanic students (I24) | decrease in isolation of white students (I24) |
| credit conditions (F34) | effects on school segregation (I24) |
| housing supply elasticity (R21) | variation in effects of credit conditions on school segregation (I24) |