Home Prices and The Middle Class

Just a few short years ago America was in a housing crisis and deep economic recession. Prices were dirt cheap and ripe for the taking by anyone who could afford to take advantage of the opportunities. 

Prior to the recession, essentially, anyone breathing could walk into a bank and get a loan to buy a house. Credit worthiness didn't seem to matter. Nor did it seem to matter if the borrower had a real job. If you could show a pay stub you could buy a house. 

But times have changed. Now it's far more difficult to get a loan, and home prices are rising at an astounding rate. This is certainly a good sign for most sellers and in some respects good for the U.S. economy; but in some markets the jump in home prices are beginning to squeeze out the middle class and leave many on the sidelines as renters.

Many developers have looked to capitalize on this opportunity buy building more homes, be it attached or detached, for the affluent and apartments for the folks in the middle. From a sheer business standpoint, I get it, and it makes perfect sense. The land for purchase is more expensive, as well as the loan to acquire it. In order to make the project worth while a developer needs to sell the unit for far more than what it cost to purchase, and if it's in a good enough location the price to sell that home is tagged for a premium. The other option is to build apartments that can be rented over the long term with the expectation of receiving positive cash flow.

This isn't bad. It's what free markets are all about. But as urban planners and developers we also must be careful not to exclude the many in order to appeal only to the few. 

In places like Brooklyn, NY, where there has been an 18% spike in home prices, finding a lesser home could realistically mean moving into a 650 square foot condo for $600,000. For the average middle class family, of two parents and three children, this sort of space simply isn't feasible. Additionally, for most middle class Americans, a large majority of their wealth tends to be found inside their personal residence. What will happen to the middle class if suddenly there is too little inventory to be purchased by them?

This is a real issue that we all are going to have to deal with, if not now, then in the very near future. While the Federal Reserve has obviously tried to lessen the blow on American's pockets by deciding to keep short-term interest rates low for a while, the fact is, eventually the day will come when not only home prices will be up, but so will interest rates. That very change alone will have a major impact not only on the middle class but also our entire U.S. economy.

There is plenty of inventory on the market for the luxury consumer, I can promise you that, at least in North Carolina. But inventory for the middle class, especially in the urban market, is slim. There's much work to be done. 

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