Rising Home Prices Deter Low-Income Workers from Cities

By Stevie Duffin Updated on 12/14/2012

By Daniel Duffield

Sales of single family homes in the U.S. increased 5.7% during the month of September, reaching the highest levels since April of 2010.

Many see these figures as an indication of economic recovery, as increasing home sales generally pushes housing prices higher. However, Daniel Shoag, associate professor of Public Policy at Harvard’s Kennedy School, believes that this increase evidences just the opposite.

According to Shoag and his colleague Peter Gangong, the recent increases in housing prices will ultimately damage the U.S. economic situation by diminishing income mobility.

In a statement to the Daily Ticker, Shoag conveyed that higher home prices have divided the country and begun to create a split between low-income and high-income locales, as many low-skilled workers cannot afford to live amongst high-skilled workers. As a result, regional income has become fundamentally imbalanced and contributed to a rise of income inequality.

Shoag argued that these low-income workers have been pushed out of pricier cities such as San Francisco and New York City into smaller cities such as Las Vegas and Phoenix, resulting in sluggish economic growth.

While Shoag states that San Franciso and Boston are “rich places,” he says that people have been discouraged from moving to these areas, instead seeking mid-wage cities. As a result, Boston has seen a rise in high-skilled workers moving in as lower-skilled workers have been moving out. This income difference has counteracted the long-standing U.S. trend of convergence between income levels.

Since 1980, the rates for income convergence have been fairly motionless, as the average income of U.S. workers has remained relatively unchanged within the last 30-years. In addition, migration of low-skilled workers has also substantially decreased.

However, these trends had been quite different prior to 1980; between 1880 and 1980, low-skilled workers tended to move to wealthier states, with average incomes between states typically coming together at an average rate of 1.8% annually.

According to Shoag, housing price increases have resulted from the rise in land regulation in high-wage regions which deter the development of lower housing prices.

Shoag also stated that local regulations have had a rippling effect through the economy, with repercussions to income migration and conversion.

However, Shoag believes that these policies can be overturned to undo this effect; Shoag has already been approached by lawmakers in Washington to determine a method to encourage affordable housing in high-income areas.