Why does inequality affect house prices in cities?

It's not necessarily surprising — or even a bad thing — that dynamic cities like Washington have higher income inequality than the national average. Cities that are home to both high-skilled industries and resources that serve the poor by definition house residents making a broad range of incomes, from minimum-wage store clerks to biotech engineers.

That doesn't mean that we shouldn't worry about widening inequality within these cities, especially when that trend is driven by falling incomes at the bottom. New data from Alan Berube and Natalie Holmes at the Brookings Institution also suggests another reason for concern: People at the bottom in unequal cities also have another problem — they tend to live in places where housing is particularly unaffordable.

New Orleans, for example, has high income inequality and expensive housing for the low-income. Same in Miami and Washington and New York. Virginia Beach, on the other hand, has low income inequality and relatively affordable housing.

But why would these two things be related, inequality and housing costs?

The inequality data here comes from an annual analysis Berube and Holmes conduct comparing the incomes households earn at the 20th and 95th percentile in large American cities. This year, they also looked at the cost a household would pay to rent a home at the 20th percentile of rental units in each city. Then they compared that cost (for instance, $10,286 a year in Washington) to what families earn at the 20th percentile of incomes.

As a rule of thumb, you shouldn't spend more than 30 percent of your income on housing. So if families in the 20th percentile by income have to spend more than that to get a home in the 20th percentile of available rents, that's a sign that they're probably paying more than they can afford. Among the 97 cities Berube and Holmes looked at, poor families in the most unequal cities spend more than half their income on rent. That number falls in less unequal cities:

Here's a different look for the scatterplot-inclined. Cities to the right of this chart have higher income inequality. And those to the top of it are also less affordable to the poor. In highly unequal New Orleans and Miami, for example, a low-income family would have to spend nearly 70 percent of its income to cover housing:

Back to what could be going on here. It's hard to say for sure looking at this data, but Berube offers a few hypotheses. In a city like New Orleans, very low incomes at the bottom make it harder for poor people to afford housing, while also widening inequality. But the larger pattern may be influenced not just by the incomes of poor people, but by the state of the housing supply.

"There may be something about the housing market in high-inequality cities that is more responsive to the upper end," Berube says. "There are more profits to be made. Having San Francisco in mind, looking at the kind of housing being built there right now, you definitely see all this momentum at the high end."

These cities are more likely, in other words, to build luxury housing, a phenomenon you may recognize in Washington, too.

Here's another idea: "In high-inequality cities," Berube adds, "political power may be more concentrated among high-income households who are then able to, say, block development that they don’t’ want to see."

Again, think of San Francisco. When high earners in high-inequality cities lobby against new multi-family housing — because it will crowd schools or create traffic or ruin the "character" — that makes housing for the poor harder to come by.