The Bethlehem Project: The housing domino effect

0:00Decisions made in Washington can affect your portfolio every day. But what policy changes should investors be watching? Washington Wise is an original podcast from Charles Schwab that unpacks the stories making news in Washington right now and how they may affect your finances and portfolio. Listen at schwab.com slash Washington Wise.

0:25Hi, how are y 'all? Hi, good, how are you?

0:28Sonja Hutson: Kayla Simon lives in a big luxury apartment building in a sea of big luxury apartment buildings in the center of Allentown. It's about 15 minutes from Bethlehem. We go up in the elevator to see what she calls her very nerdy apartment. So there's lots of low, soft gold lighting. We have a lot of decorations from the Lord of the Rings. We have Gandalf's sword. I have some minimalist posters of the original Star Wars trilogy. Hale has got dark short hair with an electric blue streak running through it and a warm, inviting smile that feels like Southern hospitality. She's originally from Tennessee, but moved here three years ago with her husband and their cats.

1:13Sonja Hutson: This is Fred. He's our best ambassador. Hi, Fred. Hale is in charge of the health and wellness program at a local university. We're in her apartment on this winter morning because it tells us a lot about how the struggling housing market is hitting the rental market. Gandalf sword and all. Kayla's part of a growing group of young people who have put off buying a home. The average age for first-time buyers across the country is now 40, according to the National Association of Realtors. That's an all-time high. And buying a home is less affordable than it's ever been, according to research from Goldman Sachs.

1:50I just want to punch a hole in a wall. Like, I don't know. It's stupid. It makes me mad.

1:58Sonja Hutson: Kayla is 34. She and her husband both have advanced degrees. And buying a home still doesn't totally feel within their grasp. We're kind of on the fence about whether or not we want to buy or keep renting. I'm terrified of being house poor. I've seen other people go through that. And I super want to avoid that at all costs. House poor. Basically, she's worried that owning a home will suck up a lot of their income. They wouldn't have enough left over to save for retirement or pay for things like repairs to the house. So for now, Kayla and lots of other people her age are continuing to rent, which means there's more demand in that market.

2:39Sonja Hutson: And if you've walked around pretty much any city in America lately, you'll know that big luxury apartment complexes like this one are popping up everywhere to meet that demand. Kayla and her husband pay $2 ,500 a month for their two-bedroom, two-bathroom unit. I saw new buildings and complexes under construction all across the Lehigh Valley, in Allentown, in Easton, and in Bethlehem.

3:10Sonja Hutson: It's like everywhere you turn down here, there's a new build. There's one down there. There's one over there.

3:29Sonja Hutson: I'm Sonia Hudson, and this is The Bethlehem Project, the series where we look at big U.S. economic and political issues through the lens of one city. I went to the Lehigh Valley to get a sense of why young people aren't buying and what kind of ripple effects that has on the rental market as a whole, from luxury apartments down to subsidized affordable housing.

3:57Sonja Hutson: We're in Kayla's spare bedroom slash office, looking at what kind of homes are out there if she were to buy. So we would like to live in Easton. Oh, look what's for sale. Yeah, there's nothing for sale here. It never, nothing ever goes on sale. Kayla said they'd want a two-bed, two-bath home, which is the same size of the apartment that they rent now, for about$380 ,000 to$450 ,000. That's our price range. But that looks kind of sad. One bath. But the thing is, even those houses that have a mortgage payment similar to their rent feel out of reach. And I don't feel like we can afford homes like that.

4:46The mortgages are about what we're paying in rent, which scares me because that's the minimum that we're going to have to pay. Rent is the maximum that I'm going to pay.

4:55Sonja Hutson: Mortgages are the minimum, Kayla says, because that monthly cost can get run up by expensive repairs. I have two friends that live in the Valley who've bought a house in the last three years, and one of them is very house poor. They had to take out loans to replace their windows. Their basement flooded. Like, all these things went wrong. And they have a beautiful home and a really cool neighborhood. But I feel like they're constantly struggling every time we go see them or go hang out. So instead of buying property in order to build wealth, Kayla has been looking elsewhere, like investing in the stock market.

5:27It also feels like investing in like the stock market feels safer at this point, too, than investing in a home that could not necessarily drop in value, but need so many renovations and things, again, that we are at risk of becoming house poor. So we're still investing like we still have retirement funds. So I don't feel like we're throwing away money living here. And I know that buying a home is a way that a lot of Americans have built generational wealth and retired off of. But that's not the only option that we have. It's much easier to invest in other things anymore.

6:05Sonja Hutson: If she was able to get the cost of her mortgage down by getting a lower interest rate, Kayla says she'd feel a lot more secure buying a place. There has been some movement there. Late last month, the benchmark U.S. mortgage rate dropped below 6 % for the first time in more than three years. But that's still a long ways off from the 3 % to 5 % rate that Kayla is hoping for.

6:36Sonja Hutson: The housing market and the rental market are under stress in the Lehigh Valley and across the country. It comes down to a mismatch of supply and demand. Let's start with the housing market. So we've had a lot of factors that have increased demand, but we haven't had anything that's really increased supply to match that demand. That's Chad Meyerhofer. He's an economics professor at Lehigh University in Bethlehem. And he says construction really tanked after the 2008 housing market crash. Because prices dropped so much, it didn't make sense to invest in housing and to build new housing. And then, you know, as the housing market kind of picked back up and unemployment was increasing, we had a couple events that caused the housing market to sort of fail to fully recover.

7:26Sonja Hutson: Some of those events include the post-pandemic bout of inflation and the higher interest rates that followed. That made financing construction projects more expensive, which slowed down production. It also made mortgages more expensive, which made people like Kayla less interested in buying. For those reasons, even though building is picking back up again, it just never recovered to the point where it couldn't meet the demand for housing that we have now. Now, Bethlehem and the Lehigh Valley experienced all of that with the rest of the country. But there were a few things that made the problem here especially acute.

8:03We've had stronger employment growth than you've had elsewhere because our economy has been fairly recession-proof, fairly resilient. We have a very diversified economy that includes logistics, healthcare, light manufacturing. That's increased the demand for housing more than what we've seen in other similar areas.

8:32Sonja Hutson: And the other thing that increased demand in the Lehigh Valley? You know, some migration away from large metropolitan areas that are in close proximity, like New York City and Philadelphia. And that happened quite significantly during the pandemic, where we saw a lot of people moving out of those major cities to relocate here. The rise of remote work means that people whose jobs are in New York City and Philadelphia had the flexibility to live further from their offices. Bethlehem and the Lehigh Valley are about an hour and a half to two hours away from those cities, which isn't too bad of a commute if you only have to do it occasionally.

9:14Sonja Hutson: So to recap, the housing market is a classic supply and demand mismatch. There are too many people looking to buy and not enough homes. The market never really recovered after the 2008 financial crisis. Chad says the slowdown in home buying has put pressure on the rental market. The city of Bethlehem estimates that its rental vacancy rate is just 2%. That is well below the national average. And a housing report from the city found that workers in low-paying jobs like food service and retail would need to double their wages in order to afford an average-price one-bedroom apartment. So generally, what we'll see is that as a household gets wealthier, they'll transition from renting to buying.

10:04And if you have something that's causing them not to do that, like, say, very high interest rates, then you have a concentration of wealthier households that are staying in that rental market. And that can lead to higher prices for rental units.

10:19Sonja Hutson: So people are staying put in their rented homes. And that also helps to explain the rise of big luxury apartment buildings. Now, those aren't necessarily a bad thing for the rental market. Any increase to supply is going to take some of the pressure off. That could actually help out low-income renters indirectly if, for example, that meant that those higher-income families weren't then going in and competing for rental space that was normally allocated to low-income households. But Chad says it's not clear yet how much it's really helping relieve pressure on the market right now. And in the meantime, low-income people are struggling to afford housing.

11:09Sonja Hutson: We are driving across the river into the south side of Bethlehem to talk to a renter's advocate about how this part of the city has changed. This is historically the lower income part of town but there's been a decent amount of gentrification.

11:31Sonja Hutson: I went to a nonprofit called Community Action Bethlehem. It works to get people into stable housing. And I went there to find out about the impact of a slower housing market on lower income renters like Amira. I do have three children. I have an 18 year old. She's in Jersey and I have two sons, eight and four. And it's just really hard as a single mom to really get out there and do what you need to do and to afford housing for them. We're withholding Amira's last name for safety reasons. She moved from Newark, New Jersey to the south side of Bethlehem about 10 years ago. She wanted a slower pace than the city to build a family.

12:10Sonja Hutson: But it was so expensive to live in Bethlehem. And what was the moment where you were like, it's too expensive to live here, we gotta build a family? My son was seven months, so a new baby. And it was just, the apartment was just a one-bedroom, and it was so expensive. And it was flights of stairs, and I'm just like, no parking, and snow. And it was just like, okay, maybe I need to downsize. Because now that she was talking about raising the rent to$1 ,800, I was like, I can't do that. So it was just a little rough for me. So Amira and her family moved to Allentown into a two-bedroom apartment that was a bit cheaper, around$1 ,400.

12:52Sonja Hutson: But she lost her job at an auto parts store because she couldn't find or afford child care. And then we got evicted. And from there, it was just, you know, trying to rebuild self with kids. So, you know, felt kind of hard times just trying to maintain. That was really hard, especially with a low credit score and evictions on her record. So my credit isn't all that good. So credit, evictions on the credit. It was, it may have been a one bedroom for three people that they wanted$1 ,500 for. Amira and her kids ended up living in a homeless shelter for a bit. And they're now in transitional housing for two years with community action.

13:38Struggling with homelessness as a single mom. You just feel like you're failing your kids and you're failing yourself. So I'm sorry, I'm getting emotional. But yeah, so you just, it was a step to say, you know what, I am doing the right thing, you know. And I do this. People are willing to help you. You just have to put yourself out there.

14:01Sonja Hutson: Part of that transitional housing program involves working on increasing her credit score. It's one of many barriers beyond just the sheer cost of rent that makes it difficult for low-income people to get housing. Anna Smith is the director of Community Action Development Bethlehem, and she says they started seeing a huge increase in evictions after the pandemic. And then we know once someone is evicted, not only do you lose your home and then have to find another place to live, you are now filling out applications for housing that require your credit score, that are checking to see if you have an eviction on your record, and that are requiring you to put down up to three months worth of rent to even set foot in a new place.

14:48Sonja Hutson: The lack of supply of rental units exacerbates that problem even more. And so when you have what we were seeing at one time and still to this day in a lot of places, you know, eight people applying for a single apartment, the person who needs some rental assistance to be able to pay those first and last month's rent or has an eviction on their record, any of those can be immediately disqualifying in getting into a new place. As for all those luxury apartment buildings being built? We can hope that some sort of filtering will occur, that you take some of the pressure off at the top and some of the folks in the middle will hopefully be able to find more affordable units.

15:27They won't be competing with the folks with the highest income. You can hope for that in the long run. But it's going to be some time, I think, before we'd be able to see that actual impact, especially here in this neighborhood. And the reality is...

15:39Sonja Hutson: For now, Amira says she feels stable in the transitional housing program, and so do her sons. They have their own room. It's big. It's spacious. They're riding scooters in the house, so they're having fun. It's a playground in the backyard. They're happy. When you're a single mom, you just, it's all about the children. You just want that space for them. want something and say, you know what, my mom did that.

16:05Sonja Hutson: All right, we're going to take a break. And when we come back, we'll talk about solutions and the political reality of making them happen.

16:18Investing with Schwab is like spending a Saturday at a great farmer's market. You can fill your reusable tote with a bit of everything. Maybe you go for some free-range, self-directed investing. Or perhaps you pick up a few farm-fresh trades while you peruse. You can even get help from a dedicated advisor. That's full-service wealth management. Mix, match, and change your mind whenever you want. Because at Schwab, you can invest your way. No matter your goals or appetite for investing, Schwab has everything you need, all in one place. Visit schwab.com to learn more.

16:59Sonja Hutson: At the far end of Bethlehem's south side neighborhood, there's an almost four acre empty corner lot surrounded by a rusty chain link fence. It may not look like a lot now. Right now, the site is mostly clear other than two residential buildings. But developer Kelly Yan has big plans for it. There's going to be a four story building here at the corner. It'll be a total of 44 units. And then back towards the Fifth Street, there'll be a series of combination of flats and townhomes. All in all, there'll be 120 new rental units as part of the gateway development. And the kicker, one bedrooms will start as low as$376 a month.

17:48Sonja Hutson: The development is aimed at people who earn between 20 and 60 % of the area median income. But Kelly and the company she works for, Penrose, aren't doing it alone. So this is mostly funded by the federal tax credits for housing. It's called low-income housing tax credit. And the rest, really, it's everybody putting their heads together to apply for a variety of funding sources at the federal and state level. And for you as a developer, is it possible to make lower-income or affordable housing without that support from the government? No. Absolutely not. No. We're standing with Sarah Satullo. She's the deputy director of economic development for the city and is working on the project with Kelly.

18:34Sonja Hutson: Sarah says it's actually more expensive to build affordable, low-income housing because of what she calls well-meaning regulations that drive up construction costs. Affordable units also just generate less income because of lower rents, so they can't take on as much debt. If you look at the total project costs for the first phase, 60 units is roughly$29 million. We're looking at right now market rate construction is about$350 to$375 a unit. If you do the math on that, then that's because they have rental income coming in that can support a larger loan. It's kind of like the same idea as if you're qualifying for a mortgage for your house.

19:16They're only going to give you a loan that matches up to your income that's coming in. So this is almost$500 ,000 a unit because you need to pay for that cost up front to subsidize the rent because the income that you then coming in have on the rent is so much lower.

19:34Sonja Hutson: On top of all the government funding, the project is also getting help from the current owner of the site. They sold the land to Penrose at a fraction of the cost. And the project would not happen without that. The city has not had a low-income housing tax credit project in more than a decade. So this is really our first large-scale affordable housing development in more than 10 years. The Gateway's 120 units is a huge accomplishment for the city. But it's only scratching the surface of what they need. The city estimated in 2024 that it needed over 1 ,000 units. And most of those needed to be below market rate.

20:22Sonja Hutson: From buying a house to finding an affordable place to rent, something that became clear to me through this trip was how big a role the government and nonprofits play. You know, we heard from Kayla, the renter in Allentown, and Chad, the economics professor, about how impactful interest rates are to being able to afford a house. We heard how government and nonprofit intervention is key to getting people like Amira back in stable housing. And from Kelly and Sarah about how critical government funding is to build the affordable units that Bethlehem desperately needs. Housing affordability and affordability in general is a big political liability for President Donald Trump and the Republicans heading into the midterm elections this year.

21:11Sonja Hutson: Here he is talking about it at the World Economic Forum in Davos in January. America will not become a nation of renters. We're not going to do that. He's been pressuring the Federal Reserve to cut short-term borrowing costs to as low as 1%. Their current range is between 3.5 and 3.75%. But the Fed has so far resisted. So Trump tried another tactic. Finally, I've instructed government-backed institutions to purchase up to$200 billion in mortgage bonds to bring down interest rates. It looks like that has worked, at least for a little bit. Like I mentioned earlier, mortgage rates fell below 6 percent, but then bounced back up.

21:54Sonja Hutson: Trump has also signed an executive order that bans large institutional investors from purchasing single-family homes. So that's the federal government, but the state is working on it too. The Democratic governor of Pennsylvania recently pledged to invest a billion dollars into building more housing. But Bethlehem Mayor William Reynolds says, There are no easy solutions, and I don't think it matters if you're a Democrat or Republican. There aren't a lot of things that you can do quickly to be able to drive down housing prices. Building takes time. The first apartments in the Affordable Gateway Project won't be available until 2028.

22:32Sonja Hutson: And beyond that, Mayor Reynolds says investing government money into housing often gets pushback from people who already own homes. The challenge with housing is that it is much closer tied to people's individual kind of identity in a way that, like, if I have my house, I don't necessarily need to care about this problem. And if I think that resources or money are going towards housing as a whole and this idea of American opportunity for people that might be people other than myself, I'd rather have that money go to pay for something else. It's the tension of individualism in America that somehow like your goal as an individual consumer is to get the best deal you can and that you don't have any responsibility as a citizen to think about how do we maintain that American opportunity, that American dream.

23:20Sonja Hutson: The American dream of owning a home is slipping away from people like Kayla, the renter we heard from at the beginning of the episode. I saw a lot of my own experience and perspective on property ownership mirrored in Kayla's. Like a lot of Americans, we grew up hearing that owning a home was the key to generating wealth and that renting was throwing away your money each month because you weren't building equity. My dad feels that way. He's pretty upset that we don't own a home. But then we became adults, and it seemed more out of reach for us than it was for our parents. He bought his house for$80 ,000 in 1989, and he was a factory worker and paid it off, like, soon after he and mom got married.

24:02And I've explained to him that living is just insanely expensive.

24:09Sonja Hutson: So for now, Kayla, her husband, and their cats are going to stay renters and try to figure out other ways to reach the American dream.

24:24Sonja Hutson: This was The Bethlehem Project, the series where we explore the biggest U.S. economic and political issues through the lens of one city. Our show was edited by Mark Filippino, and it was mixed by Sam Giovinco, fact-checking by Henry Larson. Topher Forges is our executive producer, and Cheryl Brumley is the FT's global head of audio. I'm Sonia Hudson. Thanks for going to Bethlehem with me.

25:16We'll see you next time. certainty. Private, secure, authoritative legal AI. Self-directed investing, trading, full-service wealth management, automated investing, financial planning, thematic investing, retirement planning. And to think, that's just a small taste of what Schwab offers. Because Schwab knows that when it comes to your finances, choice matters. No matter your goals, investing style, life stage, or experience, Schwab has everything you need all in one place. so you can invest your way. Visit schwab.com to learn more.