Several Indicators Point to a Challenged Segment, But There’s a Light at the End of the Tunnel
The middle-class lifestyle is becoming more difficult to maintain, impacting homeownership within the median-income group and creating impossible growth standards for entry-level buyers.
According to Pew Research, 52 percent of U.S. adults lived in middle-class households in 2016. While the number has remained relatively steady over the years, underlying factors are threatening to disrupt the balance, making middle-class homeownership more difficult to maintain and, for entry-level buyers hoping to grow their wealth, nearly impossible to achieve.
What’s to blame? Experts point to burdensome debt loads, growing income disparities and regular market challenges as the biggest indicators that the middle class could be losing its strength in numbers.
The Market Is Creating Affordability Challenges
Many industry professionals believe housing affordability and tight inventory are the biggest obstacles.
“Middle-class buyers in my market are unable to find homes due to a lack of inventory and increase in market value,” says Jacqueline Balza, broker/salesperson with United Real Estate in New Jersey. “With market values increasing, this holds buyers back because there are barely any homes in their price point to view.”
Matthew Gardner, chief economist for Windermere Real Estate, says there needs to be a “significant increase” in home construction in order to meet demand—a goal he does not believe is realistic with rising construction costs and existing home prices.
Gardner says home appreciation has been “stronger in the lower-price tier compared to homes sold in the upper-price tier,” based on data from Black Knight, Inc. and Realtors Property Resource®.
“This can stifle middle-income households,” says Gardner.
According to the National Association of REALTORS®, metro home price increased 91 percent in the second quarter of 2019.
Edward Tull, director of Technology and Process Management at JB Goodwin REALTORS®, says that Austin’s median home price has increased 30 percent in just the last five years.
“With home prices increasing in and around Austin, it can be difficult to find a single-family home under $350,000,” says Tull. “Home prices are surpassing what is considered affordable for middle-class families.”
Balza has noticed a similar trend, stating “there really is no median price point anymore.” She adds “this has impacted many people trying to purchase property as a middle-class buyer because they now have very little to no buying options. When a home does come out in the buyer’s price point, my buyers then compete with 10-15 other families who are bidding on the same home. This is driving up home prices and making it extremely hard to get these buyers under contract, let along being able to find them a home they like.”
Income Strength Is Weakening
While the national family median income increased to an estimated $78,366, according to NAR, salaries that once supported the middle-class lifestyle have weakened over time.
NAR data shows that a buyer putting down 5 percent as a down payment would need to make $62,192 per year in order to purchase a single-family home at the national median price. With 10 percent and 20 percent down payments, the income requirements drop to $58,918 and $52,372, respectively.
Of course, middle-class rankings vary widely depending on location. In more expensive metro areas, such as San Jose and San Francisco, salary requirements for median home prices shoot up to $295,832 and $233,552, even with a 25 percent down payment, according to NAR.
“Although there are certainly a number of housing markets across the U.S. that are affordable to middle-income households, they tend to be in areas with weak economies and, therefore, markets where many households do not wish to locate,” says Gardner.
According to a Redfin report, Detroit, Mich.; Rochester, N.Y.; and Dayton, Ohio, are the most affordable metros for middle-class families. In Detroit, a family only needs to earn $26,690 per year in order to purchase within the median price point. The least affordable areas for middle-class buyers are all in California: Anaheim, San Jose, Los Angeles and San Diego.
Debt Is a Serious Problem
Financial obligations continue to pose a challenge to consumers trying to maintain or achieve a middle-class lifestyle.
According to the Wall Street Journal, the middle class is going deeper in debt in order to maintain their lifestyle. In early 2019, households dedicated 9.9 percent of their disposable income to paying off debts, which include auto loans, student loans and credit card debt.
Gardner says he’s seen an increase in household debt across the board, with the exception of HELOCs, which decreased by about 7 percent.
“In the second quarter of this year, total household debt was measure at $13.9 trillion—up by 4.3 percent year-over-year,” says Gardner. “The biggest obstacle to first-time buyers is certainly student debt loads, which currently stand at $1.48 trillion.”
In Tull’s and Balza’s markets, high debt is a major factor when getting first-time buyers approved for a home loan.
“I have seen consumers deplete their finances to stay close to Central Austin and maintain a middle-class lifestyle,” says Tull.
Balza has seen many new buyers look for creative lending options because of their high-debt scenarios, but she has also witnessed a resilience to pay down debts, save money and purchase a home, despite their financial constraints.
With high debts and less effective wages, market challenges like a lack of inventory and rising home values could significantly impact middle-class homeownership across the U.S. However, one indicator may be a glimpse of a silver lining ahead.
According to the S&P CoreLogic/Case-Shiller Indices, there’s an overall slowing of home price appreciation, potentially pointing to a balanced market, which could give the middle-class the boost it needs to strengthen and stabilize.
Liz Dominguez is RISMedia’s associate content editor. Email her your real estate news ideas at ldominguez@rismedia.com.
The headline is posed as a question while the body of the article is 90% negative in the context about affordability and the shrinking of the middle class. Lots of opinions are quoted but the article seems to be very subjective. Then, in the last paragraph the reader discovers that there is some hope … Not very balanced on the whole but some good points are raised. I like to think about the glass being half full while the media tends to view it as half empty. Not trying to be critical but I read a lot about the real estate market and our economy and it is interesting to see how differently some of these things get reported. In the last few weeks the NAR reported that according to the data the affordability index is very high. When you see low interest rates and higher household incomes it is a very good sign. But we just do not have enough inventory which is pushing up prices but that will even out over time. My two cents worth …
There are ever so many things that kill the incentive for middle income families to buy homes today and also kill the desire in Owners to try to move. Years ago when I first entered real estate, you could put a few thousand dollars down by paying someone’s equity and assume an FHA or VA loan with only a $45 transfer fee. No credit check was necessary and there were only tiny charges to get it closed. With a credit check, you could assume a conventional loan again with little money to transfer the mortgage. It made it so easy. Sellers put their homes on the market and it was a “take it or leave it” attitude. Rarely was a Seller asked to do a repair. Just last week, I received from an agent a list of 111 requested repairs with some being as tiny as replace a small piece of tape on an appliance connection with non-asbestos tape and replace the rubber piece where food is put into the disposal because of one small tear in a flap. These are both $1.00 items but cause consternation in the mind of an overwhelmed Seller. The Buyer requested thousands of dollars in lieu and the Seller almost threw in the towel with the comment that it “felt like a shakedown.” I’ve had so many people tell me they are staying in their homes forever because they don’t want to go through all of that. And then there are the big bucks in the tax assessments as well as the rates that climb every few years just driving up the cost of homes over all.
All true, but you neglected to include property taxes as a deterrent to home ownership. In NY young couples may be able to afford the down payment and mortgage costs, but the very high property taxes prevent them from proceeding. Typical taxes in our area are $15,000-$30,000 / Yr. That’s on top of high sales taxes and very high state income tax. School taxes in particular are unsustainable.
Please send them out to me in Western PA — we have very affordable homes here. – People can live, work, gain equity… Mary AddamsAssociate Broker Laffey Real Estate, Manhasset NYAssociate Broker, Integrity Plus Realty, Greensburg, PA516-637-6951
Something that many people do not take into consideration when considering the affordability of a home is average incomes in the US. The “middle income” folks in America are shrinking when it comes to income. I keep hearing about cities trying to build “affordable housing” which appears to be an attempt to build homes at 1990 prices. The country really cut back on home construction during the big recession for five years and now we are paying the higher prices and dealing with the shortage of inventory.
Since President Reagan introduced trickle down economics in the 1980’s, the “average” income folks have not really had a pay raise in decades. In 1980 when the average price of a home was about $47,000 that was about equal to two years salary. Today with and average income of around $79,000 the average home price is 3-4 times annual income. When you add that to college tuition rate increases and debt load you have young people buried in debt. Average college tuition from the 80’s has increased by an average of $1025%, education went into the profit mode. All the prices have been going up but the minimum wage hasn’t moved much. The minimum wage hasn’t been changed since 2009. There isn’t much we can do about the pay increases as Realtors but we need to understand why there is an affordability issue.