How a Two-Tier Economy Is Reshaping the U.S. Marketplace

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The emergence of a two-tiered U.S. economy, with wealthy households advancing while middle- and lower-income Americans struggle, is reshaping markets for everything from housing to clothing to groceries to beer. “It’s a tale of two economies,” said Glenn Kelman, chief executive of Redfin, a real-estate brokerage in Seattle that operates in 25 states. “There is a high-end market that is absolutely booming. And then there’s everyone in the middle class. They don’t have much hope of wage growth.”

The recession blew holes in the balance sheets of all U.S. households and ended a decadeslong loosening of credit for middle-class borrowers. Now, credit is tight, and incomes have been flat or falling for all but the top 10th of U.S. income earners between 2010 and 2013, according to the Federal Reserve.

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Indeed, such midtier retailers as J.C. Penney , Sears and Target have slumped. “The consumer has not bounced back with the confidence we were all looking for,” Macy’s chief executive Terry Lundgren told investors last fall. In luxury retail, meanwhile: “Our customers are confident, feel good about the economy in general and their personal balance sheets specifically,” said Karen Katz, chief executive of Neiman Marcus Group Ltd., last month. Reported 2014 revenues of $4.8 billion for the company are up from $3.6 billion in 2009.

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On grocery aisles, the recession and its aftermath boosted sales of economy brands. At the high end, Whole Foods Market Inc. reported record sales per gross square foot last year... The trend hit auto makers some years ago, when BMW AG ’s former chief executive Helmut Panke described the U.S. market as an hourglass: lots of demand for budget and luxury brands but little in between.

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The housing market illustrates how weakness among middle-class consumers holds back the U.S. economy. Homes are generally the biggest purchase Americans make. Housing dollars ripple through the economy by triggering spending on appliances, furniture and landscaping. For the first time, U.S. builders last year sold slightly more homes priced above $400,000 than those below $200,000. As a result, the median price of new homes exceeded $280,000, a record in nominal terms and 2% shy of the 2006 inflation-adjusted peak. Total sales last year, however, were up just 1% compared with 2013, and more than 50% below their average from 2000 to 2002, before the housing bubble. New homes are also getting bigger. The median U.S. home was more than 2,400 square feet in the third quarter of 2014, a 20% increase from early 2000 and a 10% increase from the peak of the housing market in 2006.

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Young households have been slow to buy homes because of the tough job market. Many would-be buyers can’t save enough for a down payment or don’t earn enough to qualify for a mortgage. Student debt holds others back. A typical household, for example, would need around $60,000 in cash to make a 20% down payment on the median-priced new home in the U.S. To qualify for a mortgage, they would need good credit and to show an annual income of about $45,000, assuming little other household debt. A government-insured loan in this example could call for an $11,000 down payment but would require an annual income of $60,000.

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http://www.wsj.com/articles/how-a-two-tier-economy-is-reshaping-the-u-s-marketplace-1422502201