Wealth inequality is an issue that influences many societies. The top one percent of people own 40 percent of global wealth, whereas the bottom half has only one percent. But what, if anything, to do about this is unclear.
A first step may be to understand relative inequality. One measure is the Gini Index. The higher the index number (from 0 to 100), the higher inequality. Off-the-map inequality is not exclusively a poor-country trait. According to the CIA, the U.S. recently had a Gini index of 45, close to that of Mexico with 48.
Many have believed that a sign of a society’s healthiness is the ability for a family to own a house. Many benefits come along with such ownership, among them is that eventually many have a family asset.
Through statistical methods, we tested the hypothesis that inequality might be reduced when people own their homes. For the U.S., we did a state by state analysis and found that the more home ownership, the lower inequality. Next we plotted our data and divided our graph into four quadrants. Of special interest to us are quadrants one and four.
Quadrant one has high inequality and low ownership. This combination is the least desired, yet, within this sector lie some of the wealthiest states. The question is why? One possibility is that, since states in quadrant one are the richest, many people want to live there; consequently the demand for housing is high. If the supply of houses doesn’t increase; prices rise. If the housing prices are high, then people don´t buy houses and there is a lower percentage of home ownership.
With respect to inequality, population density seems to be an important variable. Many states in quadrant one have a higher density. Thus, more poor people are found in those states.
In quadrant four are states with high ownership and low inequality, which many would agree is the ideal combination. About half of these states have a relatively high GDP per capita (GDP divided by population). Although these are not the most prosperous states, they do have “comfortable conditions, in that people can own a house, enjoy a modest income and live in an environment of relatively low inequality.
We have also studied the evolution of ownership and inequality over time. In the following graph, we start at the lower left end of the graph. There, the U.S. had low ownership and low inequality. As time goes by, given the post-second-world-war economic boom, and the creation of Fannie Mae which securitized home loans, the ownership rate increased until the 1980´s, when the Savings & Loan debacle took place. As a result, the ownership rate was reduced to 1960´s levels and inequality kept on rising.
During President Clinton´s tenure, from 1993-2001, inequality was contained and ownership increased, this is plotted by the horizontal arrows going right. This trend continued with President Bush, but the trend starts to reverse in 2006.
Currently, we are at a point where we have ownership levels as low as those in the 1970`s but with a remarkably higher inequality. Steps taken to raise the rate of home ownership leading into the Great Recession were probably not worth the costs. One policy or practice used to encourage homeownership was to make available mortgages to people who could not afford to repay. We probably don’t need to replicate this experience.
In sum, the moral of the story is measure twice and cut once. Social policy, whether meant to change housing or wealth inequality conditions can be quite tricky. It helps to act. But, acting responsibly is especially important.
How to Buy a House with Low Income: Act Now