Association for Public Policy Analysis & Management

Many studies have documented the increase in income inequality in the US during the past three decades. However, few studies have examined how housing cost, which accounts for a large proportion of household income, affects the income distribution. This paper investigates how incorporating the cost of housing into the calculation of inequality affects the cost-of-living adjusted income distribution.

We use data from the Decennial Census for the year 2000 and American Community Survey for years 2005 to 2015 collected from IPUMS. Using the data, we compute various proxies of income inequality (including Gini coefficient. 90^th/10^th Income Percentile and Theil Index) and compare changes in traditionally measured income inequality and housing cost adjusted income inequality in response to house price changes.

In a strong housing market (where the change in house prices is positive), our preliminary results show that income inequality decreases in MSAs that experience greater house price increases. However, when we adjust for housing cost, we find that the adjusted income inequality does not change. On the other hand, in a weak housing market (where the change in house prices is negative), we find no changes income inequality in response to the size of the house price shock but find a substantial increase in adjusted income inequality. In both circumstances, low-income households become worse off when housing cost is considered. We find that while rents increase more in MSAs that have greater house price growth, the housing cost does not respond to the drop in the house prices in a weak housing market. Thus, when house prices fall, households’ adjusted income drops significantly, especially for low-income households whose housing cost account for a greater proportion of their income.

Beyond our attention to lower income households, we focus on the impact of falling house prices on renters, whose plight in the aftermath of the crisis the literature has largely ignored. In line with our findings, we show that the percent of households that is rent burdened grows both in strong and weak housing market. Along with results from the inequality analysis, this indicates that many renters become especially worse off when the housing market collapsed, as the drop in their income was significant while their housing cost remained flat.

Overall, our initial findings suggest that incorporating housing cost into inequality calculations makes substantial changes in how we characterize the distribution of income, widening the gap between the rich and the poor.