Wednesday, March 16, 2016

Housing: Part 128 - The Hollowing Out of Middle Class Housing

The Brookings Institute takes a look at recent data from Pew that suggests the middle class is shrinking, and checks it out on a city by city basis. (HT: TC)

Here is a graphic comparing the size of the middle class within each MSA.  What the cities at the top of the list have in common is affordable rent.  And the Closed Access cities - urban California, Boston, and New York City - fill up the bottom.  Notice how most cities have a middle class between about 47% and 54% of the population, but for those bottom dozen or so metropolitan areas, there is a real drop off.

Below I have also pasted a graph comparing Zillow's measure of rent affordability for the largest 100 metropolitan areas.  Notice that this is the mirror image of the measure of the middle class.  There is the same sharp deviation from the norm at the bottom of the list.  The worst cities are the same coastal metropolises.  The same cities appear at the top of the list, too.

And, rent is expensive in the Closed Access cities even though the missing middle income households have largely been replaced with high income households.

The coastal cities are hollowing out the middle class, mostly by refusing to build homes.



  1. Careful with this one...

    it looks like Pew defines "middle class" as a function of family size and family nominal income.

    But, it's possible that people in closed access cities tend to be single (because they value location more than other attributes) and tend to have higher nominal incomes (even if a larger fraction goes to rent), so, on the margin, are less likely to be defined as "middle class" by Pew.

    So the whole study might be an exercise in definitions that make more sense in some areas than others, i.e., while I don't dispute for a minute that closed access is a drag on the economy, I'm not sure this data supports a theme of "hollowing out of the middle class".


    1. Coming up with theoretical ideas as to why the data doesn't mean what it indicates is easy. Can you provide some additional data that indicates your speculation has merit? PS note the reference to a study that found rent largely responsible for increasing wealth inequality in

    2. The Brookings report I linked to confirms Ken's comment, and I have documented the relationship between higher incomes and rents in those cities. So you're both right. This is a problem in those cities and we need to be careful with the details.

  2. Good point. I hope we can find a way to measure the extent to which housing inflates measures of inequality and the extent to which it actually contributes to it. I'm not sure if we can. But, I do think we can estimate the total effect of both factors.

  3. Thanks for the chart. Housing is still being juiced by cash buyers, 26 percent cash buyers in January, 2016 according to Logan Mohtashami. So, this prices out a lot of people when they compete with all cash buyers. Wages simply have to increase. As El-Erian said, corporations have plenty of money to make that happen. It is almost as if corporations are borrowing from future prosperity by keeping wages low.

  4. I saw these graphs and thought you'd finally switched to Tableau. I highly recommend it. You do a lot of great data visualizing with Excel, but I guarantee Tableau would make you happier.

    In any case, very much enjoying your discussion of closed-access cities.

    Also, with inflation starting to tick up, is there finally a chance that the fed is letting things loosen?

    1. Thanks for the tip Joe! I think that will do several things I have been wanting to do. I've been playing around with it. The interface isn't completely intuitive for me. I hope I'll be able to get the knack for it without too much work.