This paper studies the evolution of segregration in a model of neighborhood choice where households are credit constrained. We model a city with two neighborhoods, variable housing supply, and two racial groups who differ in income and in relative valuation of neighborhoods. Household choose both location and housing status (renter vs. owner) subject to a mortage credit origination constraint. When credit standards are relaxed, households have access to more housing opportunities at given prices (the leverage effect) but, as demand for the desirable neighborhood increases, housing price differentials across neighborhoods increase (the general equilibrium effect.) We quantify the relative importance of both effects, and their impact on racial segregation, in a calibrated version of the model
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