According to this year’s first tuesday poll on income inequality, a full 75% of respondents believe the expansion in income inequality adversely affects real estate prices in California.
This is a hard reversal from last year, when 66% responded income inequality would not lead to falling home prices.
It’s clear the two are related — after all, when fewer prospective homebuyers have the funds to sustain demand for high-priced homes, it’s not doing the market any favors. Further, decreased access to homeownership has an outsized impact here, as California’s homeownership rate trends roughly ten percentage points below the rest of the country.
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But the incongruous poll results from this year in relation to years past raises a worthwhile question: why are readers now more concerned about income inequality? What’s changed?
A shift in mindset
For one, the issue has received increased media attention, partly due to the election year.
More significantly, the gulf between the wealthiest and poorest Americans is growing wider, as it has for decades. As a growing share of the country’s (and California’s) wealth is concentrated into the hands of a smaller number of citizens, homeownership will not emerge unscathed.
But inequality isn’t just bad for the real estate market — it’s bad for the economy as a whole. Without our current level of income inequality, the GDP of both the state and the country might be significantly higher.
As the effects of inequality become tangible, state and federal lawmakers face more pressure to provide solutions to a damaging inequitable wealth distribution. First tuesday has long advocated several solutions to this problem, including:
- raising the capital gains ceiling, currently set at just 20% for the highest tax bracket, allowing the wealthiest individuals to pay a lower effective tax rate on their income than the majority of taxpayers;
- revising California’s Proposition 13 (Prop 13), which places a disproportionate tax burden on new homeowners;
- revising §1031 transaction rules that give real estate investors free reign to avoid capital gains tax on a sale; and
- adjusting the mortgage interest deduction (MID), which overwhelmingly benefits top income earners.
Each of these steps will go a long way toward leveling the playing field for potential homebuyers in California.
Ultimately, weighing the needs of the bulk of California’s workforce against its highest earners throws the question of pricing into sharp relief. Yes, those high earners will buy more expensive homes — and often a vacation home or two on top of their primary residence. Some even become property investors, buying dozens of properties.
But compared to the housing needs of the roughly 17.4 million working individuals in California, these few ultra-wealthy individuals pale in comparison. When the collective purchasing power of lower-earning workers increases, their chances of homeownership rise significantly as they qualify for higher mortgages and rents. The more able these Californians are to buy homes of their own, the more positively the housing market will respond.
Hard to believe first tuesday claims to be a real estate trade advocate with positions such as raising capital gains, revising Prop 13 and 1031 exchanges and adjusting mortgage interest deductions. These are all main stays of the real estate industry and offer a counter balance to the predatory taxes in California. Rather, First Tuesday should write for the SF Chronicle or LA Times. At least they would be in good company with their liberal journalist friends!
Interesting article, and perhaps we should examine the root of income inequality, which could be education. The passport for attaining better positions and larger pay checks is simply by being educated. In the absence of this there will be no opportunity to enjoy the fruits of life. The country should be producing youngsters to be the future doctors, engineers, accountants, architects, technicians, etc, etc,. Instead we have a youth that are unprepared to compete in life and demand larger incomes for their families. Enacting laws and regulations will bring only a temporary solution.
Education for years has not being managed properly. The politicians’ answer was to throw more and more money into it but still obtaining negative results. We must understand that teachers cannot do it all; education is a joint venture between the family and the teachers. Let’s observe the real responsible home buyer – the most important question is what quality of school is offered for their children, and based on this they make a decision to purchase. As a consequence the home values in the neighborhood rise. I remember a Chicago leader commenting about the rise in home values in his city; if we improve our school system the values would go through the roof.
Please understand that this is not a criticism but only a commentary.