Finance

Yes, the US Middle Class is Shrinking, But It’s Because Americans Are Moving Up. And No, Americans Are Not Struggling to Afford a Home.

The chart above is on display at the Building Museum in Washington, D.C. as part of its current “House and Home” exhibit. As the title of the chart suggests, America’s middle class has been shrinking over time, from 61% of US households in 1971 to only 50% in 2015, when middle class is defined as households earning between two-thirds and twice the median household income. And that middle-class shrinkage apparently implies that there is a “widening gap between what people earn and the housing that is affordable to them” as does the leading question “Are you struggling to afford your home?”

However, there are at least two serious issues and questions that need to be addressed: a) if the middle class did shrink, where did they go? and b) is housing really becoming less affordable for Americans?

1. Middle-Class Shrinkage. If the middle class is shrinking, where are they going? There are only two places/directions they can go: Up or Down. And in fact, the middle class really is shrinking, but it’s because so many US households are moving up to higher income groups, not down to lower-income groups, as the chart below shows (thanks to AEI’s Olivier Ballou).

Over a slightly longer time period (1967 to 2016) and using a slightly different income measure of middle-class income ($35,000 to $100,000 in 2016 dollars from Census Bureau data) it’s true that the share of US middle-class households has been declining, from 53.2% of US households in 1967 to 42.1% in 2016, see left side of the graphic above. But where did the shrinking middle-class US households go? As the right side of the graphic above shows, the shrinking middle-class moved up into the group of American households earning $100,000 or more (in 2016 dollars). In 1969, only 8.1% (slightly less than one out of 12) of US households earned $100,000 or more, but by 2016, 27.7% (more than one out of 4) of US households were in that high-income category. At the same time, the share of low-income US households earning $35,000 or less decreased from 38.7% in 1969 to 30.2% in 2016. Stated differently, the 19.6 percentage point increase in the share of high-income US household between 1969 and 2016 (from 8.1% to 27.7%) was a result of: a) an 11.1 percentage point shrinkage in the share of middle-class households (from 53.2% to 42.1%), and b) an 8.5 percentage point shrinkage in the share of low-income households.

Bottom Line: There has been a shrinkage of America’s middle class over time (by either measure above), but it’s not a story of economic gloom and doom, characterized by a “widening gap between what Americans earn and the housing they can afford” but rather a positive story of economic prosperity and upward mobility that has gradually but consistently lifted millions of lower-income and middle-income US households into higher income groups over time. The fact that nearly 28% of US households annually earn $100,000 or more runs counter to the widespread narrative of an American middle-class in decline and deserves much greater attention as evidence of a dynamic and prosperous America with significant income mobility.

2. Housing Affordability. The top graphic above from the Building Museum makes the claim that because “median income has stagnated” while “home prices have surpassed pre-recession levels” there is a “widening gap between what people earn and the housing that is affordable to them.” Unfortunately, the data don’t support that claim, and in fact buying a new house today is more affordable than it was in the 1980s, 1990s, and most of the 2000s, when affordability is measured by the National Association of Realtors’ (NAR) “Housing Affordability Index” (see chart above). According to the NAR, “the Monthly Housing Affordability Index measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home based on the most recent monthly price and income data.” For example, the annual income necessary in November 2017 to qualify for 30-year, fixed rate mortgage at 4.2% to finance the purchase of a median-priced home of $248,800, assuming a 20% down payment, would be $46,656. The median annual family income last November of $74,502 would be 159.5% of the qualifying income necessary to purchase a median-price, existing single-family home and would, therefore, be a Housing Affordability Index (HAI) of 159.5 (see chart above).

Bottom Line: Since the HAI has been above 100 in every month since April 1986, that means that the typical US family has earned enough income to qualify for a mortgage to purchase the median priced home in every month for more than 40 years. And although housing affordability today at 159.5 is slightly below the peaks of above 200 in 2011 and 2012, it’s above the average HAI of 128.7 over the last 37 years, and is twice the housing affordability of the early 1980s when mortgage rates soared to double-digits for almost a decade and peaked at 18.6% in October 1981. Over the nearly 40 years that the NAR has reported its quantitative measure of monthly affordability, I think it’s fair to say there has not been “a widening gap between what people earn and the housing that is affordable to them.” In fact, it’s been exactly the opposite — housing has become more affordable to the typical American family.

MP: I haven’t personally visited the Building Museum to see the “House and Home” exhibit, but will try to visit there in the next few weeks and view the “Shrinking Middle” chart for myself. Thanks to my AEI colleague Olivier Ballou for the tip, the top photo above, and for creating the middle graphic above. For now, I’d conclude that the Building Museum is presenting two false narratives to the public: a) that a shrinking middle class, while statistically true, represents an ongoing economic decline for the typical American, and b) that a shrinking middle class has resulted in housing becoming less affordable for the typical American family. As I hope I’ve shown above, both of those narratives are false.

From - AEI.org - by Mark J. Perry

If You Enjoy Articles Like This - Subscribe to the AMAC Daily Newsletter
and Download the AMAC News App

Sign Up Today Download

If You Enjoy Articles Like This - Subscribe to the AMAC Daily Newsletter!

Sign Up Today
Read more articles by Outside Contributor
Subscribe
Notify of
4 Comments
Newest
Oldest Most Voted
Inline Feedbacks
View all comments
Kim
3 years ago

Even considering all the numbers in the charts, is it merely coincidental that the depth of the housing crisis during the great recession, which drove down existing home prices in many cases to “underwater” levels, contributes to and parallels the affordability data?

Hank
3 years ago

Bull Spin! What constitutes middle class? Is it $100,000 regardless of the size of the household? …individual, couple, family of six? Is it gross income, or net income (earning more puts the earner in a higher tax bracket)? Is it adjusted for inflation? What is the base year? What is the overall population/income chart? This article is a positive spin on a negative situation. I can’t agree with it. Household/family income is more and more multiple income earners in a household. Divide the income by residents per household. This article needs updated models and algorithms. It should use three base years, separated by say 10 years, to reflect three trends. It should also reflect three median age groups, separated by 20 years. Do the averaging statistics include foreclosed homes? That would skew the average down (and does not reflect the cost to those who lost their home). The mean income only reflects people still working. The article needs to use a per capita income, which would include both unreported income earners (who usually can’t get a home loan, for lack of earnings records), and the unemployed. You would need two charts – one that excludes government benefits (i.e., SS, SSDI, and unemployment benefits – these are not current salaries, they are government liabilities) and one that includes them. At best, Trump’s policy has slowed the decline. But, reversed it? Not yet. If you’re going to run a country on money (tax and debt), you’re better off with a businessman than a double-billing lawyer.

SARGE
3 years ago

Americans are moving up? I don’t care what your pretty little charts say. Thats BS. Are they talking Cal real estate, cause the medium price is 700,000 here. And you should see what you get for 3/4 of a mil. You can’t compare a mortgage in Iowa to one in Cal.

Rik
3 years ago

Is the Middle Class shrinking? … You bet it is! … If wages are stagnated and costs of everyday goods, services, food, cars and gasoline AND housing prices and rents has increased Un proportionately, there is only one answer, the lower class, the poor has grown immensely. In 1968, one could purchase a Ford F-150 Pickup Truck for under $5000, today that pickup would cost over $30000. That’s an increase of 1,137% the average American’s wages have not!!! … Then take the price of gasoline, in 1968 I was paying 20 cents a gallon, which included cleaning my windshield, checking my oil and tire pressure AND pumping my gas, today I pay $3.09 per gallon. The only people making more money are big business, stockholders, banks AND government while the Middle Class isn’t just shrinking, it’s dying!!! … People, there are ONLY 2 classes of people under Socialism/Communism, and that’s rich and poor and the poor WILL NEVER EVER BECOME RICH! … Anybody saying different is rich and not poor, I guarantee it.

4
0
Would love your thoughts, please comment.x
()
x