The widening gap in income distribution trends in the US has significant implications for home buying activity and homeownership. The shrinking size of the American middle class (those who make between two-thirds and double the median US household income*) has resulted in:
- More rental demand
- More demand for homes at the highest and lowest price points
- Less demand for median-priced homes
Among households headed by those under age 65, middle-income households plunged from 57% of American households in 1970 to only 45% today—a decline of 12%. (Though today’s 45% is up slightly from an average of 43% over the previous seven years.) The result has been a:
- 7% increase in the percentage of households who earn more than double the US median income, from 12% in 1970 to 19% in 2016
- 4% increase in the percentage of households who earn less than 80% of the US median income, from 31% in 1970 to 35% in 2016.
What do these income trends mean for housing?
- More rental demand and downward pressure on homeownership. With 35% of working-age households earning less than 2/3 of the US median income, compared to 31% in 1970, a lower percentage of households are able to qualify to purchase a home, and thus more will rent.
- More demand for lower-priced homes. The lowest-priced homes in the market have even more demand. In most markets, the months of supply and days on market of the lowest-priced homes are extremely low.
- Less demand for median-priced homes. The shrinking middle class (down 12% in share of households and 22% in share of aggregate income) creates less demand in the middle of the market.
- More high-end home demand. With a larger share of households having more than double the median income and a rising share who are buying later in life due to delays in marriage and having children, a rising percentage of households are buying a more expensive than usual first-time home. In our experience, this isn’t showing up in the very highest price points, but rather for homes priced up to 50% higher than the median home price in a market. Home builders in particular have benefitted from this demand, selling higher-density new homes in great locations to first-time buyers.
To learn more about wealth trends for each generation, check out our book Big Shifts Ahead: Demographic Clarity for Businesses or contact Chris Porter at 949-870-1218.
* Defined by the Pew Research Center to be households who earn between two-thirds and twice the US median household income, including an adjustment for household size. We excluded households headed by those over the age of 65 and included only wage and salary income, which accounts for 90%+/- of total household income.