Capital Shocks and the Great Urban Divide

Abstract

This paper exploits a uniquely-detailed dataset of USD 1.4 trillion worth of real estate transactions to examine how the features of US cities relate to investment pricing and risk. Our analysis identifies how parts of the urban system were differently affected by the global financial crisis and provides a powerful explanation of why US economic growth suddenly went from spatial convergence to divergence. We demonstrate that in ‘normal’ times real estate investment markets price in the differences between places, whereas in a context of financial shocks the features of a locality become important in determining capital allocations. In particular, large urban centers become an extension of the bond market, increasing local capital availability and improving capital pricing terms, whereas the capital markets move against smaller and less prosperous places.