News reports indicate that major banks in the U.S., including J.P. Morgan Chase and Wells Fargo, have begun lowering their underwriting standards for one-to-four family homes. The reason: continued decline in new mortgages in January, a Mortgage Bankers Association projection that total originations will decline to $1.116 trillion from approximately $1.755 trillion during 2013, and a preliminary estimate from Inside Mortgage Finance showing that single-family-mortgage-backed securities by Fannie Mae, Freddie Mac and Ginnie Mae were 10% down from December 2013, the lowest since January 2009.

This is an ominous indicator that needed to be nipped in the bud. Here’s why. Moderate, stable demand from “able” first-time buyers is the lifeblood or real estate, particularly when refinancing activity is practically non-existent. When demand declines, sellers are forced to either drop their asking prices or pull their properties off the market until it picks up again. But for everyone except the top 1%, current incomes do not support higher prices. Furthermore, going forward there is no reason to believe this situation will improve since most jobs being created are in the service sector and pay way below what’s required to buy a home at today’s prices. Banks lend because, with few exceptions, they have historically made money when they have done so. Simply stated, if they don’t lend, their profits drop, and if that happens their shareholders are unhappy, especially when their stock begins to decline. And then there’s the awful possibility that if the demand is allowed to continue to decline unabated it may result in another wave of foreclosures, one which, given the government’s many commitments and accumulated debt, would test its ability to neutralize.

Until recently, banks had focused on lending to low-risk wealthy individuals. But they account for only a small percentage of the population, and confining lending activity to that group necessarily results in a correspondingly low volume of originations. Since banks nominally compete with each other for market share, the only way for them to grow beyond that safe sector is to dramatically expand their activity to the less affluent.

Enter Wells Fargo, the largest originator. It is now originating FHA-insured loans to non-super prime borrowers, another way of saying not-so-affluent. These loans are attractive to the extent that most of the risk of default is transferred to the government and the banks can easily sell them in the secondary market, collect substantial fees, and quickly recover their capital to do the same all over again.

In the end, whatever compensatory action the Federal Reserve and its member banks take, whether to keep interest rates low indefinitely or lower originating standards, will prove insufficient unless the economic fundamental that caused the need for this action improves: the steep decline in the purchasing power of the middle class, formerly the largest demographic group. It is irrational to expect these good people to pay high prices for homes without the required supporting income and job security for a 30-year (or longer) commitment. In other words, going forward the only true fix is to create an entirely new mechanism for a far more equitable distribution of future income and wealth. We can have either low wages or high real estate prices, but we can’t have both.