The Effect of the Housing Crisis on the Finances of Central Cities
Saturday, November 14, 2015 : 8:50 AM
Ibis (Hyatt Regency Miami)
*Names in bold indicate Presenter
Six years after the official end of the Great Recession, revenues and spending in many of the nation’s largest central cities remain below their levels at the beginning of the recession. Although there have been only a few cases of bankruptcy, many cities are struggling to maintain core local public services. The recession coincided with the collapse of the housing market in many parts of the country. Property values declined and mortgage delinquencies and foreclosures rose sharply. In this paper, we explore the effects of these changes in the housing market on the revenues of most of the nation’s largest central cities. The most direct link between housing market and city finance is through the property tax, which provides about two-thirds of all tax revenue raised in the nation’s largest central cities. In order to compare revenue across cities, one must account for the variation in governmental structure across cities. We utilize a specially constructed panel data set on the finances of 112 large central cities between 1977 and 2012. The data set, which we call fiscally standardized cities (FiSCs), combines detailed revenue and expenditure data from the Census Bureau for all local governmental units – cities, counties, school districts, and special districts – that cover the geographic area of the central city. FiSCs are created by prorating spending and revenue data from overlapping governments, according to population or public school attendance shares. Data on the demographic and economic characteristics of cities come from the American Community Survey and data on housing conditions, including information on mortgage delinquencies and foreclosures and housing prices, come from CoreLogic. We estimate a set of regression models that explore the linkages and the timing of the effects of declines in residential housing values, and increases in rates of foreclosure, delinquencies, short-sales and real-estate owned properties on property tax revenues. We also explore city responses to housing market pressure, by gauging spending responses by expenditure category. We also provide an evaluation of which city fiscal structures appear to be best able to protect city housing markets.