A Shrinking Middle Class Is Both A Risk And Upside For Builders

With all due respect to Daniel Parolek – whose vocation and impact have inspired and galvanized a widening consideration of urban and suburban American density solutions – there was a "missing middle" before there was missing middle housing.

Leaders in residential construction, development, and investment must, then, focus not only on missing middle housing but also on the challenge and opportunity of the missing middle class.

In a 1984 New York Times op-ed piece, the late political economist and Lester Thurow led off with these passages:

IF our conventional wisdom is right and the middle class really is the social glue that holds society together, then America is in the process of becoming unglued.

A middle-class household is frequently defined as one with an income between 75 percent and 125 percent of the median household income. If so, then the middle class - which falls into an income range of $15,100 to $25,200 in 1982 - has declined from 28.2 percent of the population in 1967 to 23.7 percent now. Even when slightly different definitions of income factors constituting a middle class are applied to the statistics, the trend is not reversed. The American middle class is disappearing.

Those families that once were middle income are now split into two different income tiers. About half fell out of the middle class from 1967 to 1982, and about half rose above it. During those years, households with less than 75 percent of the median income rose from 35.5 percent to 37.7 percent of the population and households with incomes above 125 percent of the median income rose from 36.3 percent to 38.6 percent of the population.

Consequently, a bipolar income distribution composed of rich and poor is replacing the wide expanse of the middle class.

The reasons the middle class is vanishing are both political and economic, but, contrary to much that is written, the real problems are and will be political. According to American conventional wisdom, a healthy middle class is necessary to have a healthy political democracy. A society made up of rich and poor has no mediating group either politically or economically."

By any measure, Thurow struck a chord.

The American middle class, once the bedrock of economic stability and social mobility, has been steadily shrinking. Do private sector organizations – especially market-rate players in residential real estate and development – have anything to say or do about this? If so, what?

A Pew Research analysis last week revisited this territory, 40 years later. Per the Pew data – using different economic qualifiers and tiering – in 1971, 61% of Americans qualified as middle class, defined as those whose household incomes are between two-thirds and double the national median. However, by 2023, that figure had fallen to just 51%. This decline is more than just a statistic; it represents a profound shift in the socio-economic landscape of the United States. The diminishing middle class correlates with a reduction in the share of income held by these households, indicating a broader erosion of economic stability and opportunity.

Three high-level take-aways of the Pew analysis:

Americans are more apart than before financially. From 1971 to 2023, the share of Americans who live in lower-income households increased from 27% to 30%, and the share in upper-income households increased from 11% to 19%.

Notably, the increase in the share who are upper income was greater than the increase in the share who are lower income. In that sense, these changes are also a sign of economic progress overall.

But the middle class has fallen behind on two key counts. The growth in income for the middle class since 1970 has not kept pace with the growth in income for the upper-income tier. And the share of total U.S. household income held by the middle class has plunged."

This trend has far-reaching implications for the development of new residential neighborhoods across America's cities, towns, suburbs, and rural areas. As fewer households fall into the middle-income range, the demand for housing that meets the needs and budgets of this group changes dramatically.

The share of total U.S. household income held by the middle class has fallen almost without fail in each decade since 1970. In that year, middle-income households accounted for 62% of the aggregate income of all U.S. households, about the same as the share of people who lived in middle-class households.

By 2022, the middle-class share in overall household income had fallen to 43%, less than the share of the population in middle-class households (51%). Not only do a smaller share of people live in the middle class today, the incomes of middle-class households have also not risen as quickly as the incomes of upper-income households." – Pew Research

Developers and builders must navigate a complex landscape in which the traditional market for middle-class housing is shrinking while the need for affordable and accessible housing is growing.

To focus only on the role of private sector enterprises in housing as a critical part of the solution to the shrinking American middle class would overlook the significant challenges these organizations face. High barriers in the form of local zoning constraints, exorbitant fees for new residential development, prolonged permitting delays, and numerous local inspections all contribute to making projects more time-consuming and expensive. These obstacles cannot be ignored as we challenge strategic leaders to become catalysts for private sector dynamism.

An illustration from the moment:

The Federal Reserve’s rate hikes have helped slow overall prices, but they are also keeping inflation sticky because of the way homeownership costs factor into key metrics, according to housing expert Jim Parrott and Mark Zandi, chief economist at Moody’s Analytics.

In a Washington Post op-ed on Thursday, they urged the Fed to “declare victory” over inflation and start cutting rates. Central bank policymakers are meeting this coming week, and markets expect them to keep rates steady at 23-year highs." – Fortune

Stalled economic mobility and stifled ingenuity to spark households to strive and save and work their way up go hand in hand.

Moreover, this economic shift disproportionately affects people of color, who often experience downward economic mobility. This demographic change requires a strategic reassessment of how residential real estate development can foster inclusive economic growth and provide opportunities for upward mobility. Homebuilding leaders are uniquely positioned to address these challenges. They can no longer remain passive observers but must actively innovate and implement solutions that restore housing and homeownership as pathways to economic and social mobility.

The call to action for strategic leaders in homebuilding is clear: take a proactive and accountable role in expanding access to fair, decent, healthy, and safe homes. This mission is not just about meeting market demand but about sustaining the American Dream of economic, social, and financial mobility through hard work and personal financial discipline. By focusing on creating housing solutions for those in the lower income brackets (20% to 80% of area median household incomes), homebuilders can help restore the middle class and give its members a sense of well-being and relative prosperity worth striving for.

The question for business community leaders is this: Do you want to remain downstream of America's single most consequential socio-economic trend?

Or not?

As American society's landscape changes, so must the strategies of those who build its homes. By embracing this challenge, homebuilding leaders can ensure that housing remains a cornerstone of economic and social mobility, reinforcing the foundation of the American Dream for future generations.