Does Housing Drive Income Inequality?

AMA4-13-15The widening gap between the wealthy and – well, everyone else in America has occupied news headlines since the housing collapse of a few years ago. As the famous one percent gets richer and the other 99 do not, a new theory suggests that income inequality is really about housing inequality.

Income inequality isn’t new. It’s even become a part of the classic “American dream” in which a poor but enterprising individual can overcome a lack of money, rise above humble origins and get rich. But changing economic and cultural conditions have revealed that dream for what it always was – a fairytale.

In today’s world, technology, globalization and economic crises have combined to make it harder for the poor to get out of poverty and for the rapidly eroding middle class to hold the line. And while that’s going on, that small minority of the wealthy keeps on accumulating wealth.

According to a recent report from Medium.com, an MIT student’s current work suggests that this model points economists in the wrong direction. Under current conditions, those models for accumulating wealth through labor and wages may be less valid – and the real reason behind American’s stubborn income inequality has to do with housing prices and availability.

That’s the theory proposed by MIT graduate student Matthew Rognlie, who points out in recent research that in the tug of war between capital income and labor, or wage, income, capital income prevails as the route to accumulating wealth – if the equation includes housing.

As French economist Thomas Piketty proposed, wealth accumulates with one percent of the population because they’re investing in capital, not in wages. In other words, money accrues to those who invest capital in assets, including land, technology and innovations, rather than paying workers wages. The labor income model ties income inequality to factors such as stagnant wages, a sluggish job market and related factors that keep people from being able to accumulate capital and make investments that could open the door to building wealth.

But one of the most stable and enduring assets in the US and the world is housing: land and the structures that are added to it. Because people always need a place to live, land and hosing never goes out of fashion.

That’s not the case with technology and product innovations, which become obsolete quickly as new generations become available. And today’s innovation may be old hat tomorrow – or eclipsed by anther more cutting edge product from elsewhere in the world. That means that today’s technology giants may find the foundation for their wealth eroding with tomorrow’s innovations.

Likewise, in manufacturing an industry changing conditions may mean that today’s operations can’t be sustained at their current levels – and that the investment into infrastructure and personnel doesn’t yield up enough returns.

If those avenues for building wealth don’t have the staying power that they used to, housing does. It’s the common denominator for virtually everyone – and what happens with hosing is highly revealing about how wealth is distributed – and what that means for the future.

The availability and cost of housing creates clear barriers between income groups. As the US housing market climbs out of the rubble of the 2008 crash, home pries are continuing to rise, even as the inventory of homes available for sale continues to be tight in most markets.

That means that home buying becomes a reality largely for those with higher incomes and the ability to either pay cash or make large down payments on higher priced properties. That locks out lower income buyers, who can’t find properties to buy in their price range and who struggle with meeting mortgage standards and making down payments.

The lack of affordable housing in mid and low income markets, along with stagnant wages and an unpredictable job market, makes homeownership a matter of “haves” with higher income on the one side, and “have nots” on the other. And with fewer homes for purchase and fewer people able to buy those homes, rental markets heat up.

But even in the world of rental housing, demand drives up prices. And once again, higher rents and tight availability mean more access to those with higher incomes. And because of perennial demand for housing, investing in real estate becomes a route to building wealth.

Closing the income gap is always high on the list of ways to address inequality in American life. But a graduate students insights may point the way to doing just that – through the one asset that never stops being in demand. (Top image: Flickr/milestonemanagement)

Read more from The American Monetary Association:

The US; World’s #1 Tax Haven?

AMA117: What’s Happening Wit the World’s Debt with John Rubino

The American Monetary Association Team

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