from Zillow

— this post authored by Svenja Gudell

For all the talk of income inequality these days, it is America’s wealth inequality – which includes assets like a person’s home – that is perhaps most striking. The gap between the rich and poor in the U.S. was already wide prior to the Great Recession, and the housing bust and foreclosure crisis that followed only made it worse.

Those wealthier Americans better able to cope with the shock of the housing recession and that managed to avoid foreclosure through the worst of it ended up better off and with even more accumulated wealth at the end of the recession in many areas, according to Zillow’s research. At the same time, lower-income Americans that could not avoid foreclosure have missed out on what could have been massive wealth accumulation during the recovery.

Income Inequality

To be sure, income inequality is directly tied to wealth inequality, and both have huge implications for the housing market. Home affordability for low-income Americans looking to purchase even a modest entry-level home has suffered enormously in recent years – especially relative to middle- and high-income buyers looking to buy progressively more expensive homes and particularly in hot markets (figure 1).

Nationwide, a buyer earning a median annual salary in the bottom one-third of all incomes and looking to buy a home valued in the bottom one-third of all homes would need to spend 22.7 percent of their income on a mortgage as of Q2 2015, the latest quarter for which data is available.[1] A buyer earning an income in the top one-third and looking to buy a more expensive top-tier home would only spend 11.5 percent of their income on a mortgage. A year earlier, a U.S. buyer at the top would have had to devote 11.7 percent of their income to a mortgage. At the same time, a bottom-tier buyer would have needed to spend 22.5 percent of their income to a mortgage. So while mortgage affordability at the top has improved somewhat, it has actually gotten a bit worse at the bottom.

The differences are more striking at a local level. At the end of 2012 in San Francisco, for example, a potential low-income buyer looking to buy a bottom-tier home could have expected to pay 42.2 percent of their income on a mortgage payment – a stretch, yes, but probably doable. But by Q2 2015, that same buyer looking to purchase the same level of home should have expected to pay 68.4 percent of their income on a mortgage. Over the same period, the share of income a middle-income buyer purchasing a middle-tier home could expect to spend on a mortgage rose from 29.1 percent to 39.8 percent; and from 22 percent to 29.7 percent for a high-income buyer purchasing a high-end home.