STORY HIGHLIGHTS

With America’s middle class shrinking in both population share and income growth, a recent study looked to see how far such salaries go in the largest U.S. cities.

As for cities where a middle-class salary doesn’t adequately cover mortgage and other living costs, West Coast markets are found at the top. In San Jose, California, the median household income is $136,010 — but there’s a gap of nearly $60,000 for covering annual expenses. San Jose is followed by San Francisco, San Diego, Los Angeles and Seattle.

On the other end, a middle-class salary goes the furthest, respectively, in Detroit; Memphis, Tennessee; Wichita, Kansas; Tulsa, Oklahoma; and Baltimore.

For the study, the personal finance website analyzed the latest U.S. Census data to calculate each city’s median household income. It included expenses such as groceries, health care, housing, utilities, transportation and other indexes to determine a city’s average annual cost of living. Data was collected on Nov. 5.

GoBankingRates used the Pew Research Center’s definition of middle class, which refers to an income that’s two-thirds to double the median household income.

Earlier this year, a separate study by personal finance website SmartAsset showed that an individual in San Jose needed to make an annual salary of $136,739 to ‘live comfortably.’ For two working people raising two children in San Jose, they’d need to earn a combined salary of $334,547. This is the second highest on the SmartAsset study only to New York City ($138,570 and $318,406, respectively).

For comparison, the to city with the lowest salaries needed to live comfortably is Houston, Texas, at $75,088 (individual) and $175,219 (two working people raising two children).

That analysis factored in 50% of a person’s budget for needs such as housing, groceries and transportation; 30% earmarked for wants such as entertainment and hobbies; and 20% reserved for paying off debt, saving or investing.

If you’re searching for a good deal on a home, the Midwest could be a good place to look.

California, on the other hand, is the epicenter of overvalued housing markets. But it’s certainly not alone.

That’s according to data from First American Financial Corp., which found the housing markets in several major metro areas are overvalued compared to the actual buying power of local residents.

The analysis took income levels, home prices and interest rates into account to determine whether markets were overvalued or undervalued.

Home prices have soared nationally over the past decade — especially during the pandemic — and that’s driving a significant affordability crisis in many regions. High interest rates and a sustained lack of inventory aren’t helping matters.

The dynamic is leading some cities to rethink their zoning laws or search for other solutions to make housing more affordable.

The most overvalued housing markets

As of March, homes in several California communities were among the nation’s most overvalued compared to local buying power.

In Los Angeles, buying power was a mere $413,108 compared to the median existing home price of $923,750 — meaning homes were valued at 124% above buying power.

San Jose (98%) wasn’t far behind. Even with tech layoffs and migration trends, housing affordability in Silicon Valley and the San Francisco Bay Area remains a significant challenge.

Buying power in San Jose was $722,849, while home prices were almost double, at $1.43 million.

San Diego’s median price was 80% higher than what its residents could afford, while San Francisco’s was 76%.

Sky-high home prices in California, among other factors, have prompted many to leave the state.

Midwest may have room to grow

Conversely, buying power data suggests several cities across the Rust Belt have significant opportunity for property to appreciate.

Some also rank among the strongest markets for first-time homebuyers.

In Detroit, median home prices were $216,126. That’s 44% below the local buying power of $388,258. After a period of challenges, the Motor City more recently has become a poster child for revitalization amid a frenzy of new development.

Meanwhile, homes in Cleveland were selling near $182,500, while residents could typically afford $310,572 — meaning homes were 41% less than local buying power. In Pittsburgh, the median home price of $188,100 was 39% below the buying power of $310,802.

Economists say housing prices continue to pinch many buyers — and interest rates aren’t helping matters.

Researchers at Redfin Corp. noted earlier this year that homeowners are staying in their homes twice as long as they did back in 2006, when the median homeowner spent 6.5 years in one place.

That figure reached 13.4 years in 2020 but has since dipped to 11.9 years as of 2023.

“Americans who already own homes benefit from rising values and can consider themselves lucky they broke into the housing market while they could still afford it,” said Elijah de la Campa, senior economist at Redfin, in a statement. “On the other hand, price appreciation makes the prospect of buying a new home daunting or even impossible for many people who want to move.”

Residential real estate agents in the Bay Area are worried right now, and some may have good reason to be.

In a few days, a shake-up takes place that many are calling the industry’s biggest ever. A new set of rules will blow up the longtime practice that a seller’s agent splits the commission on a home sale with the buyer’s agent. Under the new rules, a buyer’s agent must have a separate agreement with their client — and that client, not the seller’s agent, will be responsible for paying them. The National Association of Realtors agreed to make these changes by Aug. 17 as part of its $418 million agreement to settle a lengthy series of class-action lawsuits alleging that the industry’s commission-splitting structure constituted price fixing.

Nobody’s quite sure how the new system will pan out, but one thing seems clear: The winners are the listing agents, who now have more power to dictate terms. The losers are buyer’s agents, who may struggle to convince homebuyers that they add enough value to the transaction to be worth paying for. Their ranks could be thinned substantially, with the industry’s newbies or bottom-tier producers most affected.

Also benefiting are the alternative service providers who have long faced an uphill struggle to establish a toehold on turf that has been zealously guarded by agents and big brokerages long tied to the old commission structure. If commissions go down, people buying and selling homes might also end up saving money on transaction costs.

As buyer’s agents will no longer be part of the listing agreement, home hunters may simply go straight to the listing agent or work through discount companies to make a purchase. For example, Redfin advertises as low as a 1% fee for the Redfin agent, compared with the 3% a buyer’s agent would expect to collect splitting a traditional sales commission of 6%.

“For our entire history, Redfin has advocated for lower fees, transparency and more choices for real estate consumers. Redfin charges customers a listing fee as low as 1%, and we don’t dictate whether or how much our sellers offer to a buyer’s agent,” Redfin told the Business Times in a statement. “And we’ve been an outlier among industry leaders in believing that the reforms could meaningfully lower fees.”

Meanwhile, more buyer-rep competitors are cropping up and offering flat fees in lieu of a percentage, and some players who’ve been in the game for years, like San Francisco’s Opendoor Technologies, are also seizing on the new opportunity.

“As buyer broker commissions decline, and direct sales from listing agents to buyers increase, Opendoor will be able to lower the spreads we charge and offer higher cash proceeds to sellers at the same margin,” the company stated on its website after the NAR settlement was announced. “We expect to see more consumers deciding to transact directly instead of listing on the MLS. Opendoor has been building this future for the last 10 years, and we are perfectly positioned to capitalize on this change, including via our marketplace.”

Longtime buyer brokers say their negotiating skills, knowledge of properties and the market and experience steering buyers around the potential pitfalls of the process create value that buyers will be willing to pay for. But they realize the ground has shifted.

“Discount brokerages are nothing new, but we are likely going to see an influx of more of them,” Vanguard Properties co-owner Frank Nolan said “But you get what you pay for.”

Still, several industry experts have predicted that a swath of brokers in Bay Area could be out of a job by the end of the year, especially if buyer’s agents’ commissions get pushed below the traditional 3%. Real estate brokerages are built on margins, and if commissions go down by 0.5% to 1%, some brokerages may be forced to shut down.

Linnette Edwards, a partner and associate broker with Abio Properties in the East Bay who has a mix of about 60% sellers and 40% buyers, said the changes are the most significant she’s seen in more than two decades of doing business, and she estimates that anywhere from 10% to 25% of local agents might leave the industry within the next 12 months. “The agents that are not taking this seriously and are not proactively moving forward with this new paperwork will be left behind,” she said. “They will have declining business because they will be unable to effectively communicate confidently their value proposition.”

Other high-producing agents also told me anonymously that they thought a 25% industry departure figure for agents was a realistic estimate.

Of course, that’s just one possible scenario, and San Francisco Association of Realtors President Vanessa Gamp is doing all she can to limit the potential for industry disruption via multiple association-wide trainings for agents and extra resources ahead of the new rules.

“There’s definitely going to be a population of the realtor community that might be more affected than others,” Gamp said. “I certainly think it’s not going to be a huge number in San Francisco, because if you’re here selling real estate, you’re already working pretty hard to do so,” she said, noting the competition in Bay Area real estate makes it a difficult career to do part time.

But Gamp and SFAR aren’t taking any chances. She said SFAR actually made the rule switch on Aug. 12 as opposed to Aug. 17 to create a runway of security for its members. SFAR has also doubled the amount of staff available the first weekend to answer phone calls and emails from members and is also providing bilingual support.

“This is a huge shift for our industry — shifting how we think as agents, how we are going to be compensated for the work that we do,” Gamp said.

And with that shift comes confusion, often in the form of gray areas regarding what’s in the no-no category. Offering any sort of commission-splitting on the Multiple Listing Service is a clear-cut violation, but what about including a link on the MLS to a private website that mentions that commissions are available to the buyer’s agent? Gamp said including such a link could get agents into legal trouble even if it doesn’t directly mention buyer’s agents commissions on the MLS.

Meanwhile, the settlement also allows for public open houses without buyer-broker agreements, but if a buyer’s agent wants to privately tour property with a potential buyer, they need to have some sort of contract signed first.

“People were nervous but once we were able to give some finite answers they were able to wrap their heads around it,” she said. “They just want to know what they can or can’t do.”

But paperwork mixups, false starts and putting the tour before the paperwork could spark the new lawsuits.

Gamp said SFAR has put in time and training in advance to prevent slip-ups.

“We realize that is the key, and so that is why we are putting out so many videos and training sessions. The association has offered to any brokerage in the city that wants an in-person training that our team will come out to the office to train on things. The California Association of Realtors has made almost all of their classes around the new forms completely free. Many of those classes cost hundreds of dollars, and they’re now all completely free to make sure there’s no barrier whatsoever for education to learn the new paperwork,” she said.

Still, there will likely be room for legal challenges. “We’re going to see attorney vultures finding these opportunities, and there will be more lawsuits than we’ve seen in the past,” Edwards said. “If agency isn’t established correctly, that’s when lawsuits ensue.”

“I’m sure we are going to learn a lot of stuff the hard way,” said Matt Sevenau with the Living in Wine Country Group affiliated with Compass.

And as for SFAR, will its tally of roughly 4,000 members remain the same a year from now?

“It remains to be seen,” Gamp said.

By the numbers

NAR members nationwide: 1.55 million

Total agents nationwide: 2 million

Total agents in California: 200,000 (CAR data)

Total NorCal MLS Alliance membership (includes Bay Area and Sacramento area): approximately 65,000

Total agents by occupation in San Francisco-Oakland-Hayward metro area: 4,750

Total San Francisco Association of Realtors membership: over 4,000

Sources: NAR, CAR, U.S. Bureau of Labor Statistics