Will the Real Estate Boom Change Philadelphia’s Status as a City of Homeowners?

Philly has a long, proud tradition as a city where home ownership is in reach for many. What happens if Philadelphians can’t afford homes here anymore?

Will the real estate boom price Philadelphians out? / Photo-illustration by Jamie Leary

Up on North 16th Street in Ogontz, a few blocks from Broad and Olney, someone bought a newly renovated rowhouse in early March, about a month after it went on the market. The price: $310,000.

Rowhouses in this part of town don’t get makeovers all that often. Most of their owners have lived in them for years and don’t feel a great need to renovate them. But every once in a while, someone moves or passes away, and that opens up an opportunity.

A friend of Azmat Alvi tipped him off to this one. Alvi, a builder in Bucks County, specializes in buying homes in family-oriented neighborhoods, mostly in the suburbs, making them look spiffy, and selling them to new owners.

“We don’t need to pick high-end, hot neighborhoods to work in all the time,” he says. “One of my friends said there is a house there, and he went to see the neighborhood around it. And it was mostly African American, middle-class, working people everywhere. So I said, ‘Yes, we should be doing some houses in these areas, too.’

“We do things the same way” no matter where his firm works, he continues: “Whatever family is going to come here, they should have the best possible features available for them.”

Whoever bought this house is getting just that from Alvi. It has an open-plan main floor with a floating metal staircase, an electric fireplace and a modern kitchen. It also has: new manufactured hardwood floors throughout. Five decent-size bedrooms. Porcelain tile in its main shower. A finished basement with a full bath and laundry, plus a third full bath on the main floor. And a large deck in back, over the garage entrance.

Most real estate pros would consider this house reasonably priced at $120 per square foot. But there’s a hitch: Breaking one of the rules of thumb for house-buying, the buyer probably couldn’t be one of its neighbors.

The median value as of 2019 for houses in the blocks around this one is $123,100. That’s 2.65 times the local median household income of $46,435 — the highest ratio the industry considers “affordable.” This house is priced at almost seven times that — way beyond the reach of families living around it. Zoom out to the census tract, and the numbers get more out of whack.

What all this means is that as waves of redevelopment and reinvestment spread beyond the neighborhoods of “Greater Center City,” a growing number of Philadelphians may find themselves priced out of their own neighborhoods. At least, Kevin Gillen, a senior fellow at Drexel University’s Lindy Center for Urban Innovation, says so.

In December, Gillen gave a presentation to the Development Workshop, a group of 50 or so of the city’s most prominent developers, architects, builders, lenders, lawyers, planners and former public officials, all devoted to promoting development in the region. He noted that from 2000 to 2021, Philadelphia went from being the second most affordable of the 11 area counties he tracks to the least affordable. What’s more, since the start of the pandemic, the house-price-to-income ratio in Philadelphia rose 15 percent, mirroring a nationwide rise.

Several factors, he says, have brought the city to this unlovely pass. 

“The big trigger was COVID and the shift in the economy to housing consumption,” he says. “People started working from home and spending more time at home during the worst days of COVID. Your house wasn’t just where you lived and worked. It was your restaurant, your theater, your gym, your spa, your outdoor space if you had a yard. So all the money that would have been spent outside the house, people started spending on their own homes, either upgrading them or looking for new places.”

Then, on top of that, millennials who had been happy renting entered the market.

During the lockdown, Gillen says, these younger buyers weren’t going out, either: “They were paying down their student debt. They were getting their credit scores up. Their savings were growing because they weren’t going out and spending money, and then, on top of that, they got their stimulus checks.”

All of this happened as they were entering their prime home-buying years. “The oldest millennials now are turning 40,” Gillen notes. “They’re getting married and pairing up, having kids, which are home-buying triggering events.” This group may not have had that much impact on house prices in the city, he says, since they were more likely to seek houses with yards, which are in short supply here. But to the extent they did buy here, they exacerbated the raging seller’s market that’s been going on for nearly four years. At the end of 2021, inventories in both city and suburbs were so low that there was just a 1.4-month supply of houses on the market. A balanced market has a five-to-seven-month supply.

Add all this together, and you get those skyrocketing price-to-income ratios and, perhaps, a threat to Philly’s long, proudly held mantle as the East Coast’s affordable stronghold for working folk. 

There are other factors that may contribute to the decreasing affordability of houses in Philadelphia. One of them lies not quite 100 miles up I-95.

For some decades now, we’ve heard about New Yorkers migrating here in search of the big-city life they love at a much lower cost. The pandemic pushed the numbers higher: Where net migration from New York to Philly averaged somewhere between 400 and 600 people annually in the 2010s, that’s risen to about 1,500.

But, says Gillen, the effect of New York transplants on our housing market is greatest at its upper end: “In the luxury segment, like on the Main Line and in Center City, a $1.5 million home that may seem expensive to a Philadelphian is a cheap home to a New Yorker. Especially if they’re telecommuting to New York and still drawing that New York salary.” With the pandemic severing the link between workplace and residence, residents of other “superstar cities,” like Washington and San Francisco, were also giving Philadelphia a look. 

These migrants and the market segment where they’re concentrated make their effect on overall affordability trivial. The real concern lies in the mid-market — neighborhoods like Ogontz that house the bulk of the city’s middle-income households. And here, Gillen says, the issue is simple: “House prices have grown, but incomes haven’t kept up.” This puts newer houses beyond the reach not only of middle-income households but also of younger first-time buyers.

Ordinarily, this would lead builders to increase the housing supply, driving prices back downward. Which they’re doing — but with some catches. According to the Center City District, in 2021, the city issued new building permits for 2,672 buildings with 26,116 units. That’s 1.8 times the number of buildings and more than 4.6 times the number of units greenlighted the year before.

“Now, we’re building apartments, not for the luxury segment of the market, but for the middle-to-upper-middle-income segment. And the developers are targeting millennials who can’t afford to buy or are afraid to buy because they remember that the biggest economic event of their life was the housing bubble and the Great Recession.”

Here’s why that surge may not improve the affordability picture, though. First, the difference in those multiples means that most of the new housing is multi-family: 87 percent will be in buildings with five or more units. And right now, at least, that means most of these new units will be offered for rent. “During the last growth cycle, the housing bubble of 2007-’08, we were building a lot of multi-family units, but those were condos,” says Gillen. “Now, we’re building apartments, not for the luxury segment of the market, but for the middle-to-upper-middle-income segment. And the developers are targeting millennials who can’t afford to buy or are afraid to buy because they remember that the biggest economic event of their life was the housing bubble and the Great Recession.”

A second reason: 2021 was the last year that developers could receive the city’s full 10-year, 100 percent property tax abatement for their projects. A law passed in 2019 cut that abatement in half as of January. So last year’s huge jump in permits issued won’t be repeated, and new permits are likely to fall significantly below last year’s.

Then there are the supply-chain issues that have contributed to raging inflation across the economy. “What we’ve been building has been slower in getting to market,” Gillen says. “Even the single-family- homes in the suburbs have been slower because of all the supply-chain issues.” And the rising cost of materials means prices for new construction aren’t likely to come down anytime soon.

So are we doomed to join the ranks of those unaffordable superstar cities?

Real estate agents aren’t as worried as Gillen. That’s because of how most buyers figure out how much house they can afford. “In real estate, people buy a payment,” says realtor Maria Quattrone, broker of record at RE/MAX @ Home in Grad Hospital. “They’re buying a mortgage payment, just like a car. So if you go in to buy a car, you have a budget. Say it’s $400 a month. So it doesn’t matter what the car costs if you’re financing it. And if they can finance it with all the taxes and everything and the payment is $400 or less, that car is affordable. It’s the same thing for the house.”

Quattrone points to the record-low mortgage interest rates of the past two years as one reason people can afford pricier houses. An interest rate of 3.5 percent means that every $100,000 financed will cost $3,500 in interest for the year. Spread that figure across 12 payments, and it adds not quite $300 to your monthly payment. That still leaves you money to play with if, say, you can afford a $1,500 monthly payment on a house. 

So let’s go back to that renovated rowhouse in Ogontz.

According to Zillow, the monthly mortgage payment, which covers not only the price of the house but the expected property taxes and homeowner’s insurance premiums, should be $1,550. That’s assuming the standard 20 percent down payment for conventional mortgages. The rule of thumb here is that your mortgage payment shouldn’t exceed 28 percent of your gross monthly income. A $1,550 monthly payment works out to 28 percent of a gross monthly income of $5,536, or $66,432 per year. That’s more than 40 percent above the median household income of the surrounding blocks — and double that of the census tract.

Now, a two-income household where each earner brings in $35,000 — right around the national median personal income — can easily afford this house. But clearly, most households in this section aren’t bringing in that much. And that’s why this wave of reinvestment and renewal makes affordability a real question.

Sociologist Elijah Anderson, a longtime Philly resident and former Penn faculty member who’s now a sociology professor at Yale, points out that this issue particularly affects Black neighborhoods like Ogontz because of how they became mostly Black. “For the longest time, Black people have operated not only in a segregated housing market, but also in a restricted housing market,” says the author of the new book Black in White Space. Historically, “As Black people move into a neighborhood, the whites flee. It’s a slow process, though it can happen quickly in places.

“At first, as the pattern goes, you have a few middle-class Blacks who trickle in, and they’re kind of tolerated. And they are very, very conscientious about keeping their yards and houses up, and they do better at it than the white folks. But there comes a tipping point. And then, even though these are middle-class Blacks, the whites, for whatever reason, begin to flee. And when they flee, that leaves a gap, and the housing values can plummet.” When that happens, poorer Black buyers move in, eventually leaving the original middle-class buyers stuck with houses that may be worth less than they paid for them. Those middle-class Black homeowners fortunate enough not to be stuck then move out themselves, and the neighborhood turns into a low-income ghetto.

As the median household income figures show, that process didn’t come to completion in Ogontz; many of its households do make decent middle-class incomes. But something else has changed from the era Anderson describes: Middle-class whites are moving back into those underinvested neighborhoods.

“Oftentimes, it’s the very liberal, or the artists” who make the first moves into disinvested neighborhoods, Anderson says. “But when they move in, they begin to turn the restricted housing market into an unrestricted one, because white people operate in an unrestricted housing market and Black people operate in a restricted one.” And because their skin color is also a form of capital, Anderson says, the new white arrivals bring more to the table than just higher incomes.

The outcome of this process could resemble Cedar Park today. The West Philly neighborhood went from majority white to about 70 percent Black to its current mix, with white people a plurality of its 1,100-odd residents. Middle-class Black people whose house values have risen as a result could, in theory, afford higher-priced homes in neighborhoods like Ogontz if they decide to move. But often, the increased values may still not be high enough to allow them to buy one of those newly renovated houses after selling their current home, while the tax hikes are enough to send them looking for new neighborhoods. This is especially true for homeowners further down the income scale.

Between this process and all the new rental housing being built, the city’s self-image could take a hit. Philadelphia has long prided itself on being a “city of homes” — one where the average Joe or Jane can own a piece of the American dream. What happens to that image as house prices and mortgage payments rise?

Nathaniel Popkin, author of several books on Philadelphia and its identities, including Philadelphia: Finding the Hidden City and The Possible City, says our gritty, home-owning self-image will likely survive. “Philadelphia was once the hardest-working city in the U.S., and at the same time, the most buttoned-down,” he writes in an email. “It’s always been the tale of two or three or 10 cities. No great city can be anything but.” Cities are complex, their identities constantly entangled.

Thus, changes in the housing market, Popkin says, won’t translate into a changed self-conception. “For one, we hold onto those images a very long time. San Francisco is somehow still remembered for the counterculture days, the Act-Up days, when it’s been almost completely lost to tech bros, their money and their needs. It’s not going to be unaffordability that breaks our self-image. But we could stick to our self-image and reinforce it in honest and useful ways by investing in housing for working people and families below the poverty line.”

Homeowners tend to have more invested, financially and emotionally, in the neighborhoods where they live; this city’s strong sense of neighborhood identity is a by-product of that.

Builders like Alvi say they aim to do just that. And programs like Jumpstart, which originated in Germantown but has since spread to other low- to moderate-income city neighborhoods — it teaches people how to find, buy and rehabilitate houses in their communities — were created to produce thousands of developers like Alvi, most of them Black and female. But as that house on 16th Street makes clear, more will need to be done to allow more Philadelphians to become homeowners again.

Homeowners tend to have more invested, financially and emotionally, in the neighborhoods where they live; this city’s strong sense of neighborhood identity is a by-product of that. But the homeownership rate has fallen since the start of the 2010s — from 59 percent in 2009 to 55 percent 10 years later — and the rapid expansion of rental housing could drive it lower. 

A majority-renter city would have different priorities from a majority-owner one. For instance, there would likely be more agitation for rent control and a greater likelihood for City Council to okay it, even though many cities have ditched such controls because they choke off construction of new apartments and maintenance of existing ones. 

Philadelphia goes to great pains to distinguish itself from New York. If neighborhoods like Ogontz become unaffordable to the average working Philadelphian, that distinction may vanish. And no one would be happy about that. 

Philadelphia magazine is one of more than 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and economic mobility in the city. Read all our reporting here.