Abstract
The climbing costs of housing, is one of the main concerns across the United States. Housing is considered affordable when it consumes less than 30 percent of total household income, and although the average household spends a quarter of its income in housing, low-income household devote between 50 and 70 percent of their income to housing. The issues with housing affordability have become evident since the 1970s, around the same time that incomes at the top of the distribution started to experience sharp growth. This thesis examines the effects of income inequality on housing affordability for the years 2011-2017 post-Great Recession, at the different levels of the income distribution and by demographic characteristics in the State of California. This study uses data from the Integrated Public Use Microdata Series (IPUMS) from the American Community Surveys (ACS). Data includes seven sample years from 2011 to 2017, with a total of 649,766 observations of households from the State of California with individual characteristics filtered by head of household.
Based on existing literature and the results of the empirical model presented in this paper, income inequality has a significant effect on housing affordability as it increases housing costs as a share of income (house price income ratio and rent price income ratio). This effect is most noteworthy for the lowest income households, and it fades as it gets closer to the top of the income distribution.