In this paper, we explore differential changes in house prices across neighborhoods within a city
to better understand the nature of house price dynamics across cities. The paper has four goals.
First, we document in detail that there is substantial and systematic heterogeneity in house price
dynamics within a city during city wide housing price booms and busts. Second, we propose a new
explanation of within city house price dynamics that is consistent with the empirical facts. In the
model, neighborhood amenities adjust endogenously based on the composition of the residents who
populate the neighborhood. Specifically, we assume that neighborhood amenities increase with the
richness of ones neighbors. In such a model, with relatively minor assumptions, households will
segregate based on income. In response to housing demand shocks, the model predicts that the
neighborhoods on the boundary between the rich and poor areas are the most price elastic. For
example, when richer households enter a city, the rich neighborhoods will expand outward turning
previous poor neighborhoods into richer neighborhoods. We refer to this process as gentrification.
Third, we empirically test this new mechanism against other mechanisms that could explain within
city house price differences. We find strong support for the existence of endogenous gentrification
in explaining housing price dynamics within a city. Finally, we show that even after controlling
for other important determinants of land prices, the endogenous gentrification mechanism is still
important in explaining cross city differences in house price dynamics.