The Effect of the Housing Crisis on the Finances of Central Cities

Many American central cities are still recovering from sharp declines in revenues resulting from the Great Recession and from a collapse in housing prices and an unprecedented surge in mortgage foreclosures. In this paper, we analyze the impact of the housing crisis on the finances of 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 statistical analysis suggests that the housing price declines and rising foreclosure rates can explain much of the decline in property taxes from 2009 to 2014. The reductions in per capita property tax revenues were reinforced by declining income and reductions in state aid in most cities. The typical city fiscal response to the Great Recession and the housing bust was to implement substantial reductions in spending, with the largest cuts occurring in capital outlays and in operating expenditures for elementary and secondary education.