Filtering

Filtering is the process of housing units changing price over time and therefore tending to be inhabited by people of different income/wealth than previously. 

History of concept

Originally and most commonly, it refers to "filtering-down," whereby housing that was built for or occupied by a higher-income group becomes less expensive and occupied by households of lower income.  Ratcliffe [1949] defined it as

"the changing of occupancy as the housing that is occupied by one income group becomes available to the next lower income group as a result of decline in market price." 

However, Lowry [1960] analyzed filtering as change in value which could be up or down:

"I propose to define 'filtering' simply as a change in the real value (price in constant dollars) of an existing dwelling unit. ... To analyze filtering as a market process, its causes and consequences, four basic constructs should be kept in mind: (1) An array of all dwelling units according to their real values ... (2) An array of all dwelling units according to their quality (by some quantifiable measure other than price). (3) An array of all households according to their real incomes ... (4) An array of supply prices of new dwelling units in each quality class...."  

later the concept of gentrification has been described as "filtering up." [cite?]

At least back to the 1940s in the United States, the concept of filtering has been used to support the argument that private, or market-rate, housing development can meet housing needs of much of the population, even if it is often originally built for or occupied by higher-income residents. While often made, the argument mostly lacked good empirical proof until Rosenthal's study (see below). 

Rosenthal (2014) study

 Substantial evidence for filtering effects was presented in (Stuart Rosenthal, 2014),  "Are Private Markets and Filtering a Viable Source of Low-Income Housing? Estimates from a 'Repeat Income' Model." in American Economic Review. He dmonstrated that filtering occurs widely, although significantly less so in recent decades in high-cost, supply-constrained areas such as the Bay Area and Boston. 

Comment from Dan Immergluck, 2 January 2017:
"I read Rosenthal piece as showing that incomes decline annually 7 times as fast as rents -->rent-to-income ratio increasing over time. And given high rents of new units being produced, I am not sure how this can be viewed as providing "affordable housing" to lower-income folks."

Comment from YIMBYwiki, 2 January 2017:
"counterpoint to Dan: even if rent:income ratio or price:income ratio increases, the unit may still be affordable to the tenant. Higher-income/wealth renters typically spend lower % of income on housing, so the ratio might often increase a lot and still be affordable."

Comment from YIMBYwiki, 2 January 2017:
also, fwiw, the households occupying down-filtered units are affording them at least in the sense of being able to move into them. They could be cost-burdened, but otoh the fact they could get the unit suggests they met some income:rent standard of the landlord.

Comment from Dan Immergluck, 2 January 2017:
"In most cities the bulk of folks under 50% AMI cost burdened. That means most landlords are accepting high rent to income ratios. Often over 50%.  
Look at recent work by @jenny_schuetz. Esp at what this means in terms of residual incomes."

 

 

Other ways new housing can affect affordability

Filtering is not the only way in which new market-rate housing may address affordability for other income groups, however.  Other reasons are 1) fungibility/substitution,  2) adaptation; 3) helping to subsidize other housing. 

1) Fungibility / substitution

The degree to which different housing units, or any good, may equivalently serve someone's needs is sometimes called fungibility, or substitutability. See Wikipedia: fungibility. In the case of market-rate housing, it is likely that often there is enough fungibility between available housing units that the buyer/renter, if that MR housing had not been developed, would have sought out another unit in the area, excluding or potentially displacing another, probably lower-income person, from that unit.

2) Adaptation 

Second, housing may be used differently or converted from its original intended use, possibly serving other and lower-income residents. Houses and apartments become shared between multiple tenants, either informally as house- or apartment-shares, or possibly by being divided into multiple legal residences. This can occur even with the first tenants of new housing, for example in San Francisco where vacant new "luxury" apartments are sometimes divided and shared between many tenants. 

3) Funding for other housing

New market rate housing projects may include or generate funds for affordable housing through Inclusionary housing programs, through Impact fees, or more generally by increasing city and state tax bases to allow funding for other housing. 

 

 

References

• Cortright, Joe. Urban myth busting: Why building more high income housing helps affordability. City Observatory. 20 Feb 2017.
  [note, article states "the median value of rental housing declines by about 2.2% per year" citing [Rosenthal 2014], this seems to be a mistake. Dan Immergluck notes "Rosenthal paper says that 2.2% per year decline is in INCOMES of the tenants, NOT price/rent of unit. The decline in RENTS is closer to 0.3% per year."
   
• Hertz, Daniel. "What filtering can and can’t do." City Observatory, 10.11.2015.  http://cityobservatory.org/what-filtering-can-and-cant-do/. 
   
• Lowry, Ira S. "Filtering and Housing Standards: A Conceptual Analysis." Land Economics, Vol. 36, No. 4 (Nov., 1960), pp. 362-370
   
• Ratcliff, Richard Updegraff. "The Economics of the Housing Problem: Preliminary Draft." (1945) 
   
• Ratcliff, Richard U. Urban Land Economics (1949). 
   
• Rosenthal, Stuart S. [2014]. "Are Private Markets and Filtering a Viable Source of Low-Income Housing? Estimates from a 'Repeat Income' Model." American Economic Review, 104(2): 687-706 (February 2014). DOI: 10.1257/aer.104.2.687.  Preprint (2013): http://faculty.maxwell.syr.edu/rosenthal/recent%20papers/Is_Filtering_a_Viable_Source_of_Low-Income_Housing_%206_18_13.pdf.
   
• Zuk, Miriam, and Karen Chapple. "Housing Production, Filtering and Displacement: Untangling the Relationships." Berkeley Institute of Government Studies - Research Brief, May 2016.
  http://www.urbandisplacement.org/sites/default/files/images/udp_research_brief_052316.pdf.