Discrimination and neighborhood effects: understanding racial differentials in US housing prices

Because race and neighborhood characteristics are strongly correlated, studies of racial housing price differentials have yielded results that vary widely depending on the types of neighborhood controls used. This paper shows that even with relatively thorough neighborhood controls, there is still evidence that correlation between the error term and regressors is a source of bias. While recent studies have tended to find evidence of a negative premium for blacks, fixed effects estimates in this paper indicate that black owners pay premiums of around 10 percent for housing. Moreover, house values decline in neighborhoods as the percentage of blacks increases, suggesting prejudicial attitudes.