We’ve heard a lot about the lack of entry level homes, and how developers can’t build them cheap enough to meet the skyrocketing demand. But there’s another side to that coin. The U.S. middle class is shrinking leaving fewer people who can afford to buy homes with a few bells and whistles, and larger numbers of people at the lower and higher ends of the income and housing affordability spectrum.
This gap between the rich and the poor has been growing for years, and goes hand-in-hand with homeownership trends. John Burns Real Estate Consulting analyzed the relationship between the housing market and middle-class Americans. The firm found that as the middle class grows smaller, demand for median-priced homes also diminishes. Instead, there’s been a growing demand for low and high-end homes along with rentals that correspond to the income level shifts .
Defining Middle-Class America
Pew Research defines the American middle class as people who earn between two-thirds and twice the current median U.S. household income. That’s a point where half of all households make more and half of all households make less than this amount. The Census Bureau reported in September of last year, that the median income in 2016 was $59,039 .
But, the unequal income distribution has been growing more pronounced for about three decades. As the Burns analysis reports, 57% of U.S. households were middle-income in 1970. Today, just 45% of them fall into that category. That’s a 12% drop in the number of middle-income earners with at least some of them sliding into the low-income category. The numbers show that low income households grew from 31% in 1970 to 35% in 2016. That’s a 4% difference. The others gained personal wealth and moved into the upper income level. Those numbers went from 12% to 19% during that same time period.
The end result is that the middle class is disappearing, but those percentages are not the only way to define middle America. There are many numerical formulas as outlined in a Brookings Institute report, but one that’s possibly more interesting is based on “aspirations.” 
It was used in a government report by Vice President Biden’s Middle Class Taskforce in 2010. The main components of that definition include: the ability to buy a home, save for retirement, have health insurance, pay for your children’s college, own a car, and go on a family vacation once a year. Being able to do those things will depend on your income and where you live, so households of different income levels, in different parts of the country, may actually be enjoying the same middle-class lifestyle. And, this definition doesn’t just include people who’ve reached those goals, but those who are working towards them as well.
However you define middle-class, that segment of the population is growing smaller along with demand for mid-market or “trade-up” homes. So there are greater and greater numbers of people at the starter home and premium levels. It’s easier for developers to provide those premium homes, but starter homes have grown scarce. NAR reported last month that the number of starter homes on the market was down 14.2% during the first three months of this year, as compared to last year.
The executive director of the National Council of State Housing Agencies, Stockton Williams, told the Burns group that builders are bringing their price-points down. He said, builders D.R. Horton, Tri Pointe, and Meritage are focusing more on homes that “may be serving families at the middle as well as the lower end of the home buyer market.”
This is a relatively new trend and wouldn’t apply to all markets, due to the high cost of construction. But, according to Williams, the mid-market demand is getting more attention now than it has before. He said of the middle-class, “Even if it is shrinking relative to other income segments, it remains significant in size and underserved in many parts of the country.”
Impact on Rental Market
The shrinking middle class, combined with the real estate inventory squeeze, has also forced many people into rentals. There are more people renting now than there have been in the past 50 years, and that’s not expected to change any time soon.
Tenants often get locked into their situation because it becomes so difficult to save money for a down payment. Prices in many areas have also gotten out of reach for many people, leaving them no option but to rent.
This may not be an ideal scenario for renters who’d prefer to own their own homes, but it creates a more stable market for rental owners. The executive director of the National Council of State Housing Agencies, Stockton Williams, told the Burns group that rental demand “will remain strong for the foreseeable future even if the homeownership rate gradually increases, because there is still such strong demand among households who lack down payment savings to buy.”
 Shrinking Middle Class: Pew Research Center
 Defining the Middle Class: Brookings