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The issue is that being rendered homeless could cause people to develop mental illness. There is a strong correlation between rates of mental illness, and income inequality. As income inequality increases, the percentage of the population with mental health issues increases.
People who don't want to fix income inequality and economic hardships are motivated to view mental health issues as the cause of people having economic troubles. They think that if they treat people's mental illnesses, they'll be to get a job, stable housing, and economic stability.
However, the idea of increased mental health issues causing economic hardship begs the question, why are people in certain areas more mentally ill than others? Every individual is unique, and people certainly experience economic ruin from mental illness, but why are the rates higher in certain areas? Researchers could study numerous different variables, seeing if different things explain the correlation between inequality and illness, but it's still impossible to definitively prove causation.
The only way to determine causation is through experiments. Simulating economic hardship to see if it causes increased rates of mental disorders would be extremely unethical, and probably expensive. Quasi-experimental studies could test how well mentally ill people do on tests that try to measure ability to work a job, but the measure would need to be perfected over numerous studies, and could have major problems with validity. It'd be a huge undertaking.
Truthfully, nobody knows for certain if treating mental illness instead of fixing our unequal system will be successful, or more akin to treating the symptoms rather than the disease. I personally think we could fix homelessness by improving the broken housing market, making housing a human right, reducing inequality, and providing mental healthcare treatment all at once. We also need to improve other variables that might be the cause of both inequality and illness. That way we will have the best chances of addressing the cause.