Housing markets often seem mysterious, but at their core they operate as a cascading system shaped by wealth, supply, and lending rules. A recent model by Abramson and Landvoigt highlights how rising wealth inequality and slow housing supply interact to push prices upward. Their framework divides housing into quality tiers, from luxury to starter units, and shows how households with different levels of wealth compete across these tiers.
A central insight is that prices at the very top do not stay isolated. Luxury buyers are a small share of the market, and in some sense they simply bid against one another for exclusivity. One might argue that they are “fools” for paying such large premiums, while the rest of the market should remain relatively affordable. But in practice the tiers are linked. When supply of luxury units is restricted, affluent households who cannot find space at the top tier shift down into the next-best homes. That displacement triggers a chain reaction: middle-income households face stiffer competition, prices at their tier rise, and the pressure filters all the way down to lower-income renters. Economists call this the filtering or musical chairs effect, and it means that adding supply at the high end can improve affordability across the board.
This cascading dynamic is exactly what makes the market work. New supply at any tier frees up units that can be occupied by someone else, allowing households to sort themselves according to means and preferences. The danger arises when either end of the ladder is blocked. If new high-end supply is not built, the wealthy bid down-market and crowd out others. If older or more affordable stock is neglected, the bottom rungs collapse and low-income households are left without viable options.
At the same time, credit standards shape who can actually buy. A household that cannot afford the payments will not receive a loan, which protects individuals from becoming dangerously over-leveraged. But this underwriting filter does not stop prices from rising overall; it only determines who gets excluded. The clearing price is still set by those wealthier households who can obtain financing. Those priced out of ownership often remain in the rental sector, where demand pressures drive rents upward as well.
Taken together, the picture is less about a simple split between the rich and poor and more about a tightly connected cascade. Housing affordability depends not only on overall supply but also on how well each rung of the ladder is maintained and allowed to expand.
Home Economics 