Is California’s Housing Crisis Making Economic Inequality Worse?

California may be, in the words of a New York Times report, “the heartland of the housing crisis,” but it is also at the heart of another serious American crisis—the crisis of economic inequality. 

The two crises are not separate. In fact, housing plays an important role in creating economic inequality, and can play a role in fixing it. To understand housing’s role, it’s important to get a grip on the two aspects of economic inequality: income and wealth.

Income Inequality vs. Wealth Inequality

Confusing wealth and income is a pretty common mistake. Here’s the difference. Income is the amount of cash a person or household takes in over a given time period, usually measured annually. Wealth, on the other hand, is the value of all assets accumulated and owned by a household—a house, a stock portfolio, or anything with permanent value. 

A person who takes home a paycheck of a million dollars per year is not necessarily a millionaire. The person with a million dollars in wealth is. In fact, according to research by financial consultant Sarah Stanley Fallaw, a typical millionaire’s income makes up only 8.2 percent of that person’s total wealth.

Within the U.S., the degree of inequality varies from state to state, but California is one of the worst. Only four states, according to a study by the nonprofit news organization The Center Square, experience higher levels of income inequality. Those are New York (the nation’s leader in inequality), Connecticut, Louisiana, and Mississippi.

California’s highest-earning families take in about 11 times more income than families at the bottom—$270,000 to $25,000—according to a 2020 report by the Public Policy Institute of California. The PPIC study found that wealth is even more unevenly distributed than income, with 20 percent of all wealth in the state held by just two percent of Californians—all of whom live in one of 30 zip codes, out of more than 1,700 in the state.

Californians are aware of these gaping economic disparities, and want something done about them, according to the findings of a separate, 2022 PPIC poll. In that survey, 71 percent of state residents said that California is divided into “haves and have-nots,” with 59 percent saying they want government to take action to allow everyone a chance at economic success.

California’s Housing Crisis

The shortage of affordable housing is a nationwide problem. In 2020, 30 percent of American households were saddled with unaffordable housing costs—with “unaffordable” defined as costs consuming more than 30 percent of monthly income—according to a Harvard University report sponsored by Habitat for Humanity. More than one of every seven households spends at least half of its income just to have a place to live, the study found.

In California the problem is even worse, with upwards of 40 percent of households classified as “cost burdened,” that is, spending over the 30 percent income threshold. About 20 percent labor under “severe cost burden,” that is, the 50 percent threshold, according to the California Budget and Policy Center. 

The direct cause of the housing crisis is a shortage of affordable housing. There just aren’t enough housing units to go around. And while the roots of the shortage are varied and complex, much of the problem can be traced to local communities that resist building new, less expensive houses. 

Historically throughout the United States, cities and towns have kept housing artificially scarce with zoning laws that prohibit anything other than single-family homes. Each lot of land, under these zoning regulations, can be occupied by only one home, and that home must be “detached,” meaning it must stand alone and cannot share a wall with any other structure—a structure that someone else might call home.

In California, the state’s largest city—Los Angeles—prohibits anything other than detached single-family homes on 75 percent of its residential land. In San Jose, the biggest city in the Bay Area and third-largest in the state, 94 percent of available land is zoned for single-family detached housing only. At the same time, according to a 2022 analysis by the housing policy think tank Up For Growth, California is responsible for more than 25 percent of the entire country’s housing “underproduction.” 

“Underproduction” is defined by the group as “the difference between total housing need and total housing availability.” By that standard, California has a total housing underproduction of 978,000 homes, out of 3.79 million nationwide.

Other estimates put the shortage at even higher numbers. A widely-cited 2016 report by the consulting firm McKinsey and Co. found that to close its housing gap, California would need to build 3.5 million homes by 2025.

Housing and Economic Inequality

The causes of income inequality are perhaps even more complicated than the causes of the housing crisis. The usual suspects include the decline of labor unions, the rise of technology which requires “skilled” workers and excludes so-called “unskilled” ones, the globalization of business and the economy, repeated tax cuts for the rich which allow America’s wealthy to hold on to an increasingly greater share of the country’s money supply, and increases in corporate profits even as worker wages have stayed mostly the same.

But the housing crisis also drives income inequality, though the issue rarely receives the same scrutiny as other causes. A report by the France-based Organization for Economic Cooperation and Development finds that housing can potentially act as a wealth equalizer because more people own houses than own other assets, such as stocks and bonds, and a home is usually the single largest asset in any household’s financial ledger. 

Countries with higher rates of home ownership tend to experience less economic inequality. At the same time, the rising price of houses—the primary source of wealth accumulation for middle-class households—makes the housing affordability crisis worse. That leaves governments with a dilemma: Policies that promote home ownership will help reduce wealth inequality. But they do nothing for income inequality, leaving lower-income families increasingly unable to build wealth by buying a house and forcing them into a position where they can end up “cost-burdened” by rent eating up their income.

Lack of affordable housing prevents people from traveling to find better-paying jobs. Areas with higher incomes also tend to have higher housing prices which would be unaffordable for people already struggling to pay their rent in a lower-income area, according to a study by the International Monetary Fund. 

Migration is an important way for workers to boost their income, but thanks to the housing crisis, many workers are effectively trapped in economically blighted areas, and left behind by the U.S. economy, creating a permanent underclass of people who can never catch up. That’s the essence of economic inequality.

“The widening gap in housing prices between superstar and other cities has thrown a monkey-wrench into a potential equalizer: moving to economic opportunity,” wrote Bloomberg News in a report on the IMF study. “This is particularly true for less skilled and less educated workers in lagging parts of the country.” 

Between 1981 and 2016, the number of workers who moved out of metro areas dropped by 25 percent among those at the bottom end of the income scale, but by only 10 percent in the upper-income range, the IMF found.

Middle-Class Wealth, Middle-Class Debt

Even though housing is the main way that the middle class builds wealth, as a 2022 paper published in the journal Economy and Society reported, home ownership is not a panacea for economic inequality.

Houses may be the largest asset in the portfolio of middle-class households, but they are also generally the largest liabilities. Mortgage balances make up two-thirds of all debt carried by Americans, which is about $15.3 trillion. California, as of 2020, had the seventh-highest mortgage-to-income ratio of the 50 states. That means Californians spent more of their income to pay off mortgage debt, 18.5 percent, than residents of all but six other states.

That percentage appears likely to increase, as the average interest rate on a 30-year mortgage in the U.S. rose from 3.5 percent to seven percent in just the first 10 months of 2022. That means new homebuyers would pay significantly more to buy houses with mortgage debt. 

House prices also can be volatile. Conventional wisdom holds that houses rise in value over time, making them a seemingly surefire way to build wealth. But conventional wisdom can be wrong. Perhaps most famously, housing prices plunged by 33 percent on average in the recession of 2008. And a housing market that rose rapidly in value following the pandemic showed signs of slowing down and even falling in some regions in 2022. In San Jose, prices fell 10.6 percent from May to the end of September.

So is housing really a way to help solve the problem of wealth inequality? Maybe not.

“It is an awkward hybrid of asset, debt and consumption good which, contrary to ingrained ideological claims, can be unaffordable, exclusionary and unsustainable,” the Economy and Society authors—from Cambridge University, UCLA and other institutions—wrote, “fuelling speculation that ‘post-homeownership’ futures beckon and indeed may be welcome.”