Confusing demand with inequality

Every so often I read a claim that the housing crisis is caused not by supply or demand, but by inequality. It occurred to me today that I should dig up information on inequality by metro area.

I discovered pretty quickly that the four most unequal large metros (measured by GIni coefficient) are Miami, New York, Los Angeles, and San Francisco: all high-cost metros. So at first glance, it thus appears that there is a strong correlation between inequality and housing prices.

But then I looked at the fifth through tenth most unequal metros, and a different picture emerged. These were, in order of Gini coefficient: Memphis, Houston, Boston, Tampa, Cleveland, and Chicago. All of these except Boston are low and medium cost metros; for example, the median home price in Memphis is under $300,000. And the differences between these metros and the high-cost metros are not enormous: San Francisco’s coefficient is .489 and Memphis’s is .486.

The least unequal metros with over a million people were mostly low and medium-cost metros,* but with a few exceptions: in Washington, Riverside and Denver the median home price was just over $600,000.

So what distinguishes the high-inequality/high-cost metros from the other high-inequality metros? As one might guess from conventional economic theory, income. The highest-cost high-inequality metros (Miami, New York, Los Angeles and San Francisco) have median household incomes over $90,000. So do Washington and Denver (although Riverside barely misses the cut at $87,000). By contrast, Memphis’s median income is just under $65,000, Cleveland’s is just under $68,000 and Houston’s is just under $80,000. In other words, high inequality plus high income = high prices. High inequality + low income = low prices.

*The bottom 10 included: Salt Lake City, Washington, Virginia Beach, Riverside, Grand Rapids, Kansas City, Minneapolis, Indianapolis, Denver, and Raleigh.