The effect of the housing crisis on the finances of central cities

In 2015, eight years after the start of the Great Recession, average per capita revenue in the nation's largest central cities was 7% below pre-recession levels, a decline that in both depth and duration is the most severe in the post-war period. In this paper, we address the role of the housing market in this decline. We analyze the impact of the boom and subsequent collapse in housing prices and the unprecedented surge in mortgage foreclosures on the finances of central cities. To link city finances to housing conditions, we draw on a specially created data base that takes account of the revenues and spending of all the local governments that provide services to city residents. Our regression analysis, which employs data from 2000 through 2014 for 90 large central cities, finds statistically and economically significant effects of both housing price changes and foreclosure rate changes on property tax revenues. We also find that property tax levy limits dampened the fiscal response to the housing bubble and bust. During the housing bubble period, property tax revenues and capital expenditures rose significantly faster in non-levy limit cities than in cities subject to levy limits, but then fell more sharply during the housing bust period. We estimate that the direct effect of the housing bust was responsible for 21% of the decline in the general revenue of large central cities from 2009 to 2011.