LAST MONTH, WE REPORTED ON THE DEEPENING divide between affluent home buyers and those who can't afford the price of a new home. A new report shows how this economic inequity hurts individuals. Cornell University professor Robert Frank studied several hundred communities in California and found that in areas where the gap between the 5 percent of earners at the highest incomes and middle-income earners is greatest, housing prices tend to spike higher for everybody.
It works like this: Wealthy buyers bid up the price of the most desirable homes in a region. As a result, the next tier of well-off buyers who previously qualified to buy those higher-end homes in turn bid the price up on the next tier properties, and the pattern of inflation continues, all the way down to the bottom.
“The cascade effect of that decision has a negative impact on the well-being of people down the economic ladder,” Frank says. “They end up working longer hours, struggling more to afford housing.”
Community assets such as good schools also play into the price trap. Families must choose between a home in an underfunded school district or a place with great schools and inflated home prices.
The solution: “There is one simple change we could make to the tax structure to address the issue,” Frank says. “First, you file your taxes the way you normally would and take your standard deduction. Then you take your official income and subtract from it what you saved over the year in things like your 401(k). The number you get is what you pay taxes on. That's a more equitable way to tax.”