Analyzing Local Economies

Analyzing Local Economies
Presentation to:
The Aspen Institute
ROUNDTABLE ON COMMUNITY CHANGE
The Funders’ Exchange on Community Change,
Poverty Reduction and Prosperity Promotion
Robert Weissbourd
RW Ventures, LLC • January 15, 2008

Agenda
Background: The DNT Project
The Nature of Neighborhood Change
Implications 1.0: Dynamic, Specialized
Neighborhoods
Implications 2.0: Specialized Tools - From
Diagnostics to Investment
I
Implications 3.0: Innovation Capacity
II
III
IV
V

About Living Cities
“A partnership of financial institutions, national foundations and federal
government agencies that invest capital, time and organizational
leadership to advance America’s urban neighborhoods.”
I Background: The DNT Project
AXA Community Investment Program
Bank of America
The Annie E. Casey Foundation
J.P. Morgan Chase & Company
Deutsche Bank
Fannie Mae Foundation
Ford Foundation
Bill & Melinda Gates Foundation
Robert Wood Johnson Foundation
John S. and James L. Knight Foundation
John D. and Catherine T. MacArthur Foundation
The McKnight Foundation
MetLife, Inc.
Prudential Financial
The Rockefeller Foundation
United States Department of Housing &
Urban Development
LIVING CITIES PARTNERS:

Partners and Advisors
The Urban Institute
Participating Cities: Chicago, Cleveland, Dallas and Seattle

We Know Where We Want to Go...
Common Goal:

The Challenge:
Scarce Resources, Many Options
 Community-Based OrganizationsCommunity-Based Organizations: select: select
interventions, identify assets and attractinterventions, identify assets and attract
investmentinvestment
 GovernmentsGovernments: tailor policy and interventions: tailor policy and interventions
 BusinessesBusinesses: identify untapped: identify untapped
neighborhood marketsneighborhood markets
 FoundationsFoundations: target interventions,: target interventions,
evaluate impactsevaluate impacts

Information Resources

Increasingly available,
but more progress to be made

Gap between
practitioners and academics:
need “Clinical Economics”(Sachs)

Few decision systems for
neighborhood practitioners,
investors and service providers
Gap between
practitioners and academics:
need “Clinical Economics”(Sachs)

Comprehensive Neighborhood Taxonomy
BusinessBusiness PeoplePeople
Real EstateReal Estate AmenitiesAmenities
Social EnvironmentSocial Environment
 Improvement orImprovement or
deterioration withindeterioration within
typetype
 Gradual vs. TippingGradual vs. Tipping
pointpoint
 From one type toFrom one type to
anotheranother
 Port of entryPort of entry
 BohemianBohemian
 RetirementRetirement
 UrbanUrban
commercializedcommercialized
 EmploymentEmployment
 EducationEducation
 CrimeCrime
 Housing stockHousing stock
 InvestmentInvestment
activityactivity

PHYSICAL:
Distance from CBD, vacancies, rehab activity, …
Drivers Model and Data
TRANSPORTATION:
Transit options, distance to jobs, …
CONSUMPTION:
Retail, services, entertainment, …
PUBLIC SERVICES:
Quality of schools, police and fire, …
SOCIAL INTERACTIONS:
Demographics, crime rates, social capital…

Agenda
The Nature of Neighborhood ChangeII

Agenda
The Nature of Neighborhood ChangeII
a. Measuring Change: the RSI
b. Overall Patterns
c. Specialized Patterns
d. Degree and Pace of Change
e. Drivers of Change

Theoretical Framework
 Use Demand for Housing as Proxy for Neighborhood HealthUse Demand for Housing as Proxy for Neighborhood Health
 Look at Quality Adjusted Housing Values to CaptureLook at Quality Adjusted Housing Values to Capture
Neighborhood AmenitiesNeighborhood Amenities
 Look at Change in Quantity of Housing to Account forLook at Change in Quantity of Housing to Account for
Supply EffectsSupply Effects
Amenities
Structure Rent
Housing
Price
IIa Measuring Change: the RSI

Final Product: The DNT RSI
RSI Estimation Coverage Using Case/Shiller Method
Time Period: 2000 - 2006
RSI Estimation Coverage Using DNT RSI Method
Time Period: 2000 - 2006

Looking at Particular Tracts:
High Appreciation in Logan Square

Contour Model of 2004-06 Prices around Mt. Prospect Property
Spatial Distribution of Housing Values –
Mount Prospect
1450 S. Busse
Sales Transactions
Tract Boundaries

Chicago Neighborhood Change, 1990-2006
2006
IIb Overall Patterns

Initial Conditions and Appreciation
APPRECIATION
59.7
-1.0
MEDIAN HOUSING PRICES 1990
Up to $38,000
$38,001 - $63,750
$63,751 - $107,500
Over $107,500

Change in Price: Poor Neighborhoods Present
the Most Opportunities for Investment

Partly Due to Lack of Information,
These Areas Are Also the Most Volatile
TEMPORAL VOLATILITY OF INDEX
0.14 - 0.93
0.94 - 1.33
1.34 - 2.54
2.55 and above
APPRECIATION
59.7
-1.0

Patterns of Interest: Tipping?
Chicago, North Side
IIc Specialized Patterns

Patterns of Interest: Neighborhood Turnaround
Dallas, Southeast Side

Patterns of Interest: Neighborhood Decline
Cleveland, East Side

Neighborhood Change Is a Slow Process
Neighborhood Mobility by Time Interval
5 Years
10 Years
15 Years
No Change 1 Quintile 2 or More Quintiles
58%
33%
8%
64%
30%
6%
71%
25%
4%
IId Degree and Pace of Change

Yet Substantial Change Occurs
in Select Neighborhoods
Median Sales Price Transition Matrix
Cleveland, 1990-2004
Final Quintile
Initial Quintile 1 2 3 4 5
1 76.9% 15.4% 7.7% 0.0% 0.0%
2 5.1% 51.3% 25.6% 15.4% 2.6%
3 2.6% 26.3% 26.3% 39.5% 5.3%
4 7.7% 2.6% 28.2% 23.1% 38.5%
5 7.7% 5.1% 10.3% 23.1% 53.8%
IId Degree and Pace of Change

Neighborhoods and Regions
IIe Drivers of Change

Across Cities, 35% of Neighborhood
Change is Accounted for by Regional Shifts
R Squared from Regression Models of Tract RSI on Region
Cleveland Chicago
Dallas
Seattle

Across Cities, 35% of Neighborhood
Change is Accounted for by Regional Shifts
R Squared from Regression Models of Tract RSI on Region
Cleveland Chicago
Dallas
Seattle
81%
57%
28%
7%

The Big Picture:
Urban Neighborhoods Are Coming Back
Chicago Cleveland Dallas Seattle
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
Average Tract Appreciation Rate (1990-2004)
Suburbs
City

The Big Picture:
Neighborhood Change = Changing Neighbors?
Ratio of HMDA Borrower Income (2000-2005) to Census Income (2000)

The Big Picture:
Drivers of Neighborhood Change
 Mobility is the key mechanism of change
 Movers are attracted to areas with undervalued housing
but sound economic fundamentals (employment, income,
education, young adults)
 Being connected is important: proximity to job centers,
access to transit, lower commuting times are positive
 Cultural and Recreational Amenities (art galleries, bars
and restaurants) help, but are not the main event
“The Goldilocks Theory” …

The Big Picture:
Drivers of Neighborhood Change
 Race is still a factor: even controlling for income, influx
of minorities in a neighborhood leads to lower
appreciation
 Neighborhood Spillovers are important: what happens in
your neighborhood reflects what happens in the
neighborhoods around you
 Context matters: substantial variation by type and stage;
current conditions have large affects on degrees and
patterns of change

The “Little” Picture: Few Silver Bullets

Neighborhood Convergence
Beta Convergence in Cook County, 1990 - 2005

Characteristics of Poorer Neighborhoods
that Tend to Converge
Strong evidence suggests convergence is more likely:
 Closer to the Central Business District
 In neighborhoods with more turnover
 With more Social Capital
– Civic, Social, Fraternal, Political, Religious, Business
and other Membership Associations

Characteristics of Poorer Neighborhoods
that Tend to Converge
Moderate evidence favors:
 Educational levels
 Supermarkets
 Transit nearby
 Income diversity
 Art Galleries nearby
 Eating establishments nearby

How Drivers Interact Also Varies by Place
Far from CBD and with
High Income Diversity

Summary  Implications
 Neighborhoods are highly specialized
 Neighborhood change is a function of people and money
moving in and out
 This in turn varies based on neighborhood type and stage
of development – different people and investors choose
different neighborhoods in the context of larger markets
and systems
 As a result, what matters varies by place. For any given
neighborhood, the goal could be continuity or change in
type, and implementation entails understanding who you
want to stay or move in, and what factors matter
to them

Summary  Implications
Two major implications:
1. We need a framework for understanding
neighborhoods as dynamic, specialized, and
nested in larger systems
2. We need much better tools for customized
analysis of local economies

Agenda
Background: The DNT Project
The Nature of Neighborhood Change
Implications 1.0: Dynamic, Specialized
Neighborhoods
Implications 2.0: Specialized Tools - From
Diagnostics to Investment
I
Implications 3.0: Innovation Capacity
II
IV
V
III

Neighborhoods are Complex
Dynamic, Specialized NeighborhoodsIII

Neighborhoods are Dynamic

Neighborhoods are Nested in Larger Systems
Which Drive the Flows of People and Capital

Neighborhoods are Nested in Larger Systems
which drive the Flow of Capital and People

Functioning Neighborhoods Connect Residents
and Assets to Larger Systems
Poverty Productivity
Connectedness
Isolation

Functioning Neighborhoods Connect Residents
and Assets to Larger Systems
 Employment networks
 Entrepreneurial opportunities
 Business, real estate investment
 Expanded products and services
 Productive, healthy
communities
 Undervalued,
underutilized assets
Poverty Productivity
Connectedness
Isolation

Economic Systems: Identifying Key Levels and
Levers of Market Activity
Level: Market Operations
PRODUCTION CONSUMPTIONEXCHANGE

Level: Market Operations
PRODUCTION CONSUMPTIONEXCHANGE
Transaction
costs
Finding costs
Measurement
costs
LEVERS
Taste
Income
LEVERS
Productiv
ity
Costs
LEVERS

PRODUCTION CONSUMPTION
EXCHANGE
Market Operations

Level: Market Environment
INSTITUTIONAL
CONTEXT
Enabling Laws
Prescriptive Regulation
Entry Barriers
OTHER EXOGENOUS
INFLUENCES
Infrastructure
Factors/resources
Technology
Tastes
PRODUCTION CONSUMPTION
EXCHANGE
Market Operations

Applying the Framework
STEP 1A: What type of neighborhood do you want to be?

Starter Home Community

STEP 1B: What drivers will get you there?

STEP 1B: What drivers will get you there?
• Specific Retail Amenities
• Child Care
• Schools
• Safety
• Affordability

STEP 4: Specify Interventions
Commercial Land Assembly
(production – costs)
Specialized Market Data
(exchange – finding costs)
ECONOMIC SYSTEM
Retail
Markets

Developing New Tools for the Field
Question/Goal Tool
Anticipate and Manage Neighborhood Change Pattern Search Engine
Enabling Investment in Inner City Real Estate Markets RSI  REIT
Track Affordability and Neighborhood Housing Mix Housing Diversity Metric
Anticipate and Manage Gentrification Early Warning System
Planning Community Development Interventions Neighborhood Change Simulation
What neighborhoods are similar along multiple dimensions
of interest?
Similarity Index/ Custom Typology
What drivers differentiate neighborhoods with respect to a
specific outcome of interest?
CART
How will a specific intervention affect its surrounding area? Impact Estimator
What locations will maximize the impact of an
intervention?
Spatial Multiplier
Does the impact of an intervention vary in different places? Geographically Weighted Regression
Specialized Tools - From Diagnostics to InvestmentIV

Pattern Search
What It Does:
 For identified patterns of change, finds other
neighborhoods that have been through or are
going through the same pattern
Applications:
 Enables identifying comparable neighborhoods
with respect to particular patterns of change in
order to identify key factors and effects
 Enables anticipating and managing particular
patterns of change

Pattern Search Example:
Gentrification in Chicago
 Goal: Anticipating Neighborhood Change
 How it Works: Define a Pattern and Find Matching Cases
 Example: Possible Gentrification Pattern Defined Based
on a Neighborhood in Chicago

Zooming In: Wicker Park Area

Pattern “Spreading”
to Nearby Tracts

Possible Application:
Anticipating and Managing Gentrification
Different Appreciation Patterns Found in the DNT RSI

Housing Diversity Metric
What It Does:
 Tracks the affordability and mix of the housing
stock (distribution, not just median)
 Applications:
 Enables tracking the range of housing available in
the neighborhood
 Better indicator of possible displacement than
median prices alone

Example: Tracking the Price Mix
Strong Overall Appreciation,Strong Overall Appreciation,
Range of Housing Options Is NarrowingRange of Housing Options Is Narrowing

Example: Tracking the Price Mix
Strong Overall Appreciation,Strong Overall Appreciation,
Range of Housing Options Is NarrowingRange of Housing Options Is Narrowing
Strong Overall Appreciation, butStrong Overall Appreciation, but
Range of Housing Options Is Still WideRange of Housing Options Is Still Wide

Percentage of Affordable Homes, 1990-2006
19901990

20062006
Percentage of Affordable Homes, 1990-2006

Classification and Regression Tree (CART)
What It Does:
 Identify similar neighborhoods with respect to an
outcome of interest and its drivers
Applications:
 Identify leverage points to affect the desired
outcome
 Meaningful comparison of trends and best
practices across neighborhoods

Sample CART: Foreclosures
40 Variables Tested

Sample CART: Foreclosures
40 Variables Tested
Outcome:
Number of
Foreclosures (2004)
Drivers:
% Subprime Loans in
Previous Years
Mean Loan Applicant
Income
% FHA Loans
% Black Borrowers

CART Output: Chicago Segments

Cluster 8: Defining Traits and Risk Factors
Segment Profile:
 Isolated, underserved, predominantly African American
communities. High rates of unemployment and subprime
lending activity.
Primary Risk Factor:
 Percentage of subprime
loans (primary driver of
foreclosures) is at its
highest and still on
the rise

Impact Estimator
What It Does:
 Estimate impact of an intervention on
surrounding housing values (or on other outcome,
e.g. crime)
Possible Applications:
 Evaluate the impact of a development policy
 Choose among alternative interventions based on
estimated benefits to the surrounding community
 Advocate for a specific intervention

Example: What is the effect over time and
space of LIHTC housing?
PRELIMINARY – FOR ILLUSTRATION PURPOSES ONLY

Impact of LIHTC on Surrounding Properties
Estimated Distance Decay Function – LIHTC ProjectsEstimated Distance Decay Function – LIHTC Projects
Distance from Intervention – Chicago Blocks (1 block = 1/8 mile = 660 ft)Distance from Intervention – Chicago Blocks (1 block = 1/8 mile = 660 ft)
DNTRepeatSalesIndex,1=FurthestAwayDNTRepeatSalesIndex,1=FurthestAway

Specialized Tools - From Diagnostics to InvestmentIV Specialized Tools - From Diagnostics to InvestmentIV
Applying the Estimator to a Specific Project:
New Shopping Center in Chicago
New Shopping CenterNew Shopping Center

Geographically Weighted Regression
What It Does:
 Estimates how drivers of neighborhood change
vary by neighborhood
Possible Applications:
 Analyze impact of policies and interventions
 Tailor strategies to specific neighborhood types
 Define geographic scope of intervention

Example: Impact of Supermarkets
Effect of 1990 supermarkets on 1990-2000 appreciation

Innovation in Economic Development
What is Innovation?What is Innovation?
 “The specific instrument of entrepreneurship... The act that endows resources
with a new capacity to create wealth.” (Drucker)
 “The process whereby ideas for new or improved products processes or
services are developed and commercialized in the marketplace.”
Innovation is not just thinking something; it’s doing something. In theInnovation is not just thinking something; it’s doing something. In the
field of economic development, that means it entails making a realfield of economic development, that means it entails making a real
difference in the world.difference in the world.
The field suffers from an “Innovation Gap”:The field suffers from an “Innovation Gap”:
Outstanding academics, researchers and think-tanks who develop critical
new ideas, but whose job is not to convert them to practical, applied
products.
 Accomplished practitioners with deep expertise in particular subjects or
places, but rarely with time, capacity or resources to undertake new
product development and deployment.
 Lack sophisticated processes, systems or collaborative institutional
framework for large-scale R&D, product development and scaling.

Context and Opportunity
Innovation has always been the only long term driver of growth. This is just as true for economic development as
it is for the private sector. Innovation drives growth largely through product development: new technologies, goods, services and
methodologies which change individual, organizational or systems efficiency, productivity and performance. The knowledge
economy enables, accelerates and places a premium on innovation and product development, particularly through knowledge
networks and synergies, as information technologies have made knowledge content a greater part of value added, enhanced
networks for exchange of knowledge content, accelerated change and rewarded flexible adaptation.
This is a fertile time for product development in the economic development field.
 Market-based approaches to economic development create major new avenues for developing products to enhance particular
markets to include and invest in underutilized assets.
 A more holistic approach to development heightens the need for new ways to identify and leverage the linkages across subject
areas and geographies. Organizations are looking for opportunities for cross-subject learning and collaboration, and see the
need for new institutions to consolidate our knowledge base and develop the next generation of products.
 Increased focus on entrepreneurship, urban efficiencies, linkages of neighborhoods and regions, individual driven systems,
“bottom of the pyramid” business strategies and social venturing all create opportunities, as does the emergence of “disruptive
technologies” (e.g. smart documents, smart cards, web 2.0 platforms).
 As the field becomes more business-like, opportunities for adapting private sector internal business systems products to
development organizations expand, including established systems for innovation.
Product development for the economic development field is happening ...
 The Center for Financial Services Innovation: assisting the financial services industry to identify, develop, and implement new
products that deliver asset-building opportunities to the underbanked market and are profitable for both company and
customer.
 The Urban Markets Initiative: improving the availability of information and seeding information products to enable expanded
market activity in urban communities.
 The Dynamic Neighborhood Taxonomy Project: developing new tools that community based organizations, local government
agencies, businesses and foundations can use to better target their investments and interventions to different types of
neighborhoods.
… but the field lacks the institutions and incentives for large scale product development.
The timing is right for a new institution that would build on these trends, more deliberately and
systematically foster product development, create new tools to enhance the effectiveness of economic
development organizations, and bring products to scale.

Building on Solid Foundations
The private sector invests hundreds of billions of dollars in research and development. A
vast body of work describes the mechanisms of product development and innovation.
Private sector R&D consortia prove the value and enhanced productivity flowing from
collaborative knowledge networks focused on applied research and product
development. These consortia provide important models for how collaboration is
structured, how research and product development proceeds, and how innovations
generated through collaboration are adopted and deployed in the marketplace.
What makes these models successful?
 They have established comprehensive systems and resources for moving
through the stages of product development from opportunity identification to
scaling.
 They bring a broad cross-section of the right people from multiple
organizations (users, experts, designers, etc.) to the table. The collaborative
sharing of knowledge and resources leads to cross-fertilization of ideas and fosters
innovation. The broad participation also facilitates the dissemination of cutting edge
analysis and products.
 The recognition and trust that the consortia gain enable them to define protocols
and standards for entire industries.
Examples of private sector R&D consortia include the Semiconductor Manufacturing Technology, the International
Electronics Manufacturing Initiative, and the Financial Services Technology Consortium. The type of collaborative
research and development process carried out by these consortia has generated major innovations that shape our
everyday life, from the Universal Product Code (UPC) to the transistor.

Why Isn’t This Happening Already?
Despite the vast current opportunities, product development does not happen as
naturally or readily in the economic development field, perhaps due to structural
challenges characterizing the field and its organizations.
 Different incentive structures: in the private sector, financial returns motivate
entrepreneurs to continually develop new products and ideas and test them in
the marketplace. Non-profit organizations are naturally more risk-averse and
have more complex, less predictable incentives to innovate.
 Lack of direct user feedback: the marketplace provides rapid feedback on the
value of new products and services through consumer response. Assessing
the value of economic development interventions is more difficult and less
rigorous. Poorly designed subsidies sometimes prevent market feedback or
reduce incentives to innovate.
 Less capacity: organizations generally have fewer, shorter term financial
resources; more narrowly focused skills, with less product development
expertise; challenges attracting talented entrepreneurs, technologists and
product developers.
 Fragmentation: smaller organizations, focused on narrower issues or places.
 Lack of well developed networks, systems for product development, and
organized markets.

The Innovation Network for Economic Development
The Innovation Network for Economic Development (INED) would be a
new large-scale, collaborative institution devoted to fostering
innovation and productivity in the economic development field.
Building on models already tested in the private sector, INED would
identify and undertake high potential applied research and product
development, through a user-driven process engaging practitioners,
researchers, businesses, technologists, policy makers, foundations and
other stakeholders.
INED would constitute a knowledge network, able to identify needs
and opportunities across sectors, and to develop, test and scale
practical development products, filling the existing gap between
academic research and economic development practice.
The network would also enable cross-fertilization, consolidation
and certification of tools, and development of operating platforms,
standards and business technologies for the economic development field.

Discussion
 General Comments and Questions?
 What are You Trying to Better Understand
About Neighborhoods?
 What Impacts are You Trying to Achieve
and Measure?
 What Tools and Applications Would Be
Most Useful?
 Partners: Corollary Research, Tool Development
and Testing, Other?
Innovation CapacityIV

Analyzing Local Economies

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