State Watch

Booming city economies push middle class out

Nicole Vas

An explosion of job growth in the hearts of America’s largest cities has driven the recovery from the worst economic recession in modern history, sending wages soaring and unemployment rates plummeting.

But along with a growing number of high-wage, high-skill jobs, home prices are rising in urban cores at a much faster clip than in suburbs or rural areas. It’s an indication that the decades-long trend of upper-income residents moving out of urban areas is reversing itself. 

Increasingly, metropolitan leaders say that higher housing prices are threatening their middle class, forcing residents to choose between exorbitant housing costs or long commutes from the suburbs. 

“We’ve had such great business opportunity and growth, but with it has come great challenges,” Seattle Mayor Jenny Durkan said in an interview. “We’re really a city where people can’t afford to live anymore. A lot of people of color have been displaced and pushed out of the city, the middle class can’t afford to live in Seattle.”

“We are challenged with workforce housing. These are people who are working hard every day, these are families where people are going to work 40 hours a week and yet don’t make enough to afford housing without being overburdened,” Denver Mayor Michael Hancock said. “The middle class is being squeezed out.” 

The median single-family home in the United States sold for $235,500 in 2016, according to data compiled by the National Association of Realtors, up 59 percent since 2000 — and up 36 percent since 2011, when housing prices bottomed out after the recession. In cities like San Francisco and San Jose, Calif., the median cost of a home is now more than $1 million. 

The cost of renting a home is rising, too. Between 2011 and 2017, the median rent in the nation’s 36 largest urban areas rose nearly $400 a month, or about 20 percent, according to the real estate firm Zillow. The median rent in San Francisco and San Jose is now about $3,500 per month. In nine other cities — Boston; Seattle; Washington, D.C.; San Diego; New York; Dallas; Denver; Austin, Texas, and Sacramento, Calif. — the median rent is north of $2,000 a month. 

Those prices are being driven up in part because post-recession jobs are being created disproportionately in cities. After the recession, a majority of all new jobs created — and a majority of all new businesses started — have appeared in large cities.  

A 2016 report from the Economic Innovation Group found more than half of all new businesses created since the recession were established in just 20 large urban counties. Today, a quarter of the nation’s GDP comes from just six metro areas — New York, Los Angeles, Chicago, Houston, Washington and Dallas. Another quarter comes from the 7th through 25th-largest metropolitan areas. 

That’s great news for those big cities overall. But the impact is that home prices are rising faster than inventory can be added.

“This is a great time in our economy. Unemployment is at all-time lows. But the supply of housing has not kept up with that,” said Kevin Faulconer, the mayor of San Diego. 

Experts say that rising home values are usually accompanied by a race to build more units. But after the recession, when housing prices in fast-growing cities such as Las Vegas and Phoenix cratered overnight, the typical rush of new construction has not materialized. 

“Generally, housing supply is highly cyclical. What is unique this time, for 10 years we have been greatly underproducing” new homes, said Lawrence Yun, chief economist at the National Association of Realtors. “The uniqueness of multiple years of underproduction is showing up in these high housing costs.”

For generations, Americans have followed a typical pattern as they age and as their incomes advance. Younger Americans tended to live closer to urban centers. As their incomes grew, as they got married and had children, those people would then move farther out of the urban centers, trading residential space for longer commutes.

But longer commutes present their own challenges. In cities without good transportation systems, longer commutes mean more cars on the roads, choking already-crowded infrastructure in cities that are racing to build more roads.

“We are facing the loss of people and communities in our city. They can’t afford to live in neighborhoods they’ve lived in for a long time,” said Steve Adler, the mayor of Austin, one of the fastest-growing large metropolitan areas in America. “As they move further out, their transportation costs go up. Our mobility, transportation and congestion issues grow.” 

The recession appears to have slowed, if not reversed, that trend. Since 2010, cities have grown faster than suburban areas every year except 2017, according to Brookings Institute demographer William Frey. At the same time, more jobs are being created in cities than in suburban areas that were once the hubs of new employment, a legacy of a recession that hit urban areas and suburbs differently.

“The boom was really concentrated in the suburbs. [The bust] hit hardest in those same areas. But the recovery has been slower in those areas. So urban cores didn’t have quite as exaggerated a boom, but they had a much stronger recovery,” said Aaron Terrazas, a senior economist at Zillow. “We have seen increasingly employment centers and job growth in downtown cores outpace job growth in outlying areas.” 

In the wake of the recession, the median home value per square foot has risen 57 percent in urban areas. It has risen 38 percent in suburban areas, and just 23 percent in rural areas, according to Zillow data.

Some cities have been harder hit by the housing crisis than others. Places such as Seattle, Boston and San Francisco — geographically isolated against bodies of water — have been unable to grow fast enough to keep pace.

Others have handled growth better, especially if they are able to use urban planning strategies to connect separate business districts. Terrazas pointed to Washington, D.C., where the Metro connects downtown’s urban core with growing business centers in Reston and Tysons Corner, Va., and Montgomery County, Md. Both Terrazas and Yun said Dallas is thriving because it relies not on one urban business district, but several distinct areas of commerce.

And some cities that suffered especially during the recession are now pitching renewed versions of themselves to attract new businesses, contrasting their lower housing costs with higher-priced mega cities nearby. Indianapolis and Pittsburgh — two finalists for the Amazon HQ2 project that would mean up to 50,000 high-paid tech workers moving in — both make low housing prices a selling point. 

“I think there’s an opportunity for low cost cities to try to attract” workers and jobs, Yun said. 

The U.S. Conference of Mayors, meeting this week in Washington, met with officials at the Department of Housing and Urban Development (HUD) to press for more money to build affordable housing units. Mayors from both parties said both the Obama administration and now the Trump administration have not done enough to supply cities with the funding they need to keep middle classes near their urban cores. 

“The federal government, HUD, has been checking out of that business for a long time now,” said Marty Walsh, the mayor of Boston. “When the federal government is not part of that equation, it makes that difficult.” 

If big cities cannot solve their housing crises, some worry the fundamental nature of those cities will be forever altered.

“We are very much in danger of becoming a city of only those who can afford to be there, and that’s not the city any of us want to live in,” Denver Mayor Hancock said.

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