The missing Middle CRISIS & the virtuous cycle
Two- pronged: increasing demand and decreasing supply
The U.S. is experiencing a severe two-pronged housing crisis that has been named the “Missing Middle.” Over the last 50 years, the highest incomes have skyrocketed pulling up the average income but leaving behind the median household income. The situation, often referred to as the disappearance of the Middle Class, can be better described as the Middle Class falling behind the middle. This sector of the population can now simply be referred to as "Moderate-Income". Housing, where the price of homeownership has escalated faster than wages, illustrates how previously Middle Class households no longer occupy a middle point between opulence and subsistence. Starter homes representing the bottom 25% of pricing are offered at $200,000 (Lending Tree); the U.S. median home price offer is about $400,000; and luxury housing, the top 5% of house pricing begins at $1.9 million (Redfin). The effect of these numbers can be demonstrated by how long it will now take the median family to save enough money to have the downpayment on the median house today versus 40 years ago. In 1967, the median family would take about 5-6 years to save enough after taxes to afford a 20% downpayment on the median home. Today that number has expanded five-fold to about 27.5 years. For all reasonable intents, moderate-income families have become Forever Renters, and this group of households is continually expanding.
Simultaneously, the existing housing stock in the US that is affordable to moderate-income households is aging and cannot be replaced as construction cost inflation has outpaced rent growth. Since 1967, multifamily construction costs have risen by about 1250% while median rents have risen by a bit over 1000% forcing owners of new construction to seek higher rents from higher income tenants. The result is the Missing Middle Housing Crisis: demand for rental housing for moderate-income households is growing while the supply of these units is shrinking. Overall, researchers estimate that over 50% of moderate-income renters are rent cost-burdened, paying over 30% of their gross incomes for rent and utilities.
the solution creates a virtuous cycle
Allagash cannot solve these deeply rooted problems on its own, but we believe that investment capital to preserve existing housing affordable to moderate-income households is needed now. The largest source of capital, institutional investors, has largely stayed on the sidelines, mainly because few investment vehicles have been built for this sector. That is the gap Allagash was created to fill.
Allagash Founding CEO/Co-CIO Tony Barkan conceived the company and the Fund with dual objectives: providing safe, comfortable, affordable housing for MI families and pursuing superior returns while controlling risk for investors.
While each objective is desirable in its own right, the two objectives are also designed to reinforce each other in a virtuous cycle. As return-seeking capital enables Allagash to acquire SFM properties and institutionalize their management, quality of life can improve for moderate-income families. As these families choose to make Allagash properties their long-term homes, improving tenant stability should cause tenant turnover and operating costs to decrease, thereby increasing property values and investment returns. Those returns can then attract further investment, and the cycle begins again.
As an emerging manager pursuing these objectives, Allagash seeks to achieve significant scale and create a new paradigm for mission-driven real estate investing. When institutions begin to increase their capital commitment to the value proposition of moderate-income housing, the rate at which the crisis has been expanding should begin to slow.
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David Puchi
Chief Business Development Officer
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