Indiana University SPEA Edward J. Bloustein School of Planning and Public Policy University of Pennsylvania AIR American University

Poster Paper: The External Impact of C D F I Home Improvement Loans: A Study of Worcester, MA after the Crash

Thursday, November 12, 2015
Riverfront South/Central (Hyatt Regency Miami)

*Names in bold indicate Presenter

John C. Brown and Joseph Biasi, Clark University
We know that foreclosures can depress the valuation of neighboring houses. Foreclosures can thus shift owner incentives towards less maintenance and eventually prompt deterioration of an affected neighborhood’s housing stock. Various forms of foreclosure relief or prevention strategies have been developed precisely to forestall such a chain of events. Another initiative to forestall neighborhood decay has received less attention in the literature, but merits a closer look: the home improvement lending of Community Development Financial Institutions (CDFIs). CDFIs are non-profit financial institutions that target lending to low-income and other disadvantaged communities who may lack access to credit from conventional financial institutions. Of total lending of $8 billion by CDFIs during the 2005-2012 period, about one-fifth was for home purchase or home improvement lending.

This study assesses whether home improvement lending by a CDFI offers spillover benefits to the surrounding neighborhood. Home improvement loans in the study area of Worcester, Massachusetts are made to homeowners to correct issues such as faulty sewer connections, roofs in disrepair or poorly-fitting windows. Although relatively inexpensive to remediate (a typical loan is about $15,000), if left unresolved these problems can result in more significant structural problems that could eventually make the house uninhabitable and lead to abandonment. The few studies that have examined home improvement loans have attempted to identify the impact solely by examining the sales price behavior of homes as a function of distance to the targeted property; they have concluded that these loans have only a minimal impact.

This case study uses an alternative empirical design to evaluate the neighborhood impact of home improvement loans granted by the Worcester Community Housing Resources, Inc. (WCHR, Inc.), which is a CDFI serving Worcester and the surrounding communities.  Conducted at the request of WCHR, Inc., the study uses a difference-in-difference design. It assesses the treatment effect of a new loan by examining the evolution of sales prices of houses in the neighborhood of loan recipients both prior to and after the granting of a home improvement loan. To overcome sample selection issues, the study also includes the sales prices of houses surrounding properties of the one-half of loan applicants who applied for, but did not receive a loan. In actuality, the measureable differences between successful and unsuccessful loan applicants are not very large, so that the treatment effect of the loan is likely well-identified. However, to sharpen the regression discontinuity design, the analysis also focuses on the middle two quartiles of the loan applicant pool, which includes marginally rejected and marginally accepted applicants. In all cases, the study finds that even modest improvements generate measureable external benefits to the sales price of each adjacent home. The size of the positive benefits is about the same or even larger than estimates of the adverse impact of foreclosures on nearby house sale prices that have been found in most studies. Our study suggests that modest investments targeted to owners with the correct incentives can contribute to stabilizing neighborhoods.