Home prices have increased 42% since 2020, but with both interest rates and borrowing costs soaring, you need an income of 80% or more to comfortably buy a home in today's market.
Median incomes have only increased by 23% over the past four years, leaving many people out of homeownership.
In 2020, a household with an annual income of $59,000 could purchase a typical home for approximately $240,815. At the time, that income level was lower than the U.S. median income of $66,000, meaning more than half of U.S. households had enough cash flow to buy a home without overspending their budgets. do.
Currently, homebuyers need to earn $106,000 a year to afford a home with a median price of $342,941.
That's $47,000 more than you needed to earn to buy a home in 2020, and far higher than the current median income of $81,000.
These findings from a new analysis from Zillow highlight how difficult entry into homeownership is as home purchase costs outpace income growth, locking hopeful buyers out of the market. clarified what is happening.
Concerns: Few of the major metros evaluated were affordable to median incomes. Real estate companies define affordability as not spending more than 30% of your income after offering a 10% down payment.
“The income required to purchase a home is far, far greater than the average household income,” said Orpheus Divongi, chief economist at Zillow, who conducted the analysis. “Rising costs are taking a toll on many families looking to get on the housing ladder.”
read more: how to buy a house
Monthly payments nearly double
As home prices and mortgage rates rise, the monthly mortgage payment for a typical U.S. home has nearly doubled over the past four years.
In fact, today's typical buyer will face monthly mortgage payments that are 96% higher compared to 2020 levels, Zillow found. This means his average monthly payment, including a 10% down payment, is $2,200.
The main difference is that mortgage interest rates ended in January 2020 at nearly 3.5%. So far this year, interest rates have hovered between 6.5% and 7%.
Dramatic increases in interest rates and home prices are putting prospective buyers in a difficult position. In particular, housing prices have been outpacing wage growth for more than a year.
For example, Divongai noted that to buy a typical home, buyers needed an income of $97,000 last year, up from $86,000 in 2022. That's $22,000 more than last year's median household income of $75,000.
“The income required to comfortably buy a typical home is now six figures,” Mr. Devongai said. “A combination of rising prices, mortgage rates, and limited supply led to the large increase.”
So far, there are no signs that mortgage rates or home prices will ease anytime soon.
Interest rates rose to nearly 7% at the end of this month, and Fannie Mae economists expect rates to fall to 6% by the end of the year. Zillow also predicts home prices will rise 0.9% compared to 2024, to an average of $349,611.
“Collective purchasing to address the affordability crisis”
Affordability pressures are delaying young buyers buying their first home.
According to research from Zillow, it will take 8.5 years for households earning the median income to save enough for a 10% down payment, one year longer than in 2020.
The age of first-time home buyers is also gradually increasing.
Doug Duncan, Fannie Mae's chief economist, told Yahoo Finance: “Traditional affordability metrics are at their lowest levels in 30 years, and this impacts the age of first-time homebuyers. Deaf,” he said. “This means more resources need to be arranged before entering the buying market, and that typically takes time.”
According to Fannie Mae, the average age of entry-level buyers is 36, up from 31 just five years ago. More and more buyers are turning to “house hacking” to save up for a down payment. This is defined by Zillow as renting out part of your home or your entire property to save money.
Meanwhile, about 21% of people who made a purchase last year reported receiving financial help from friends or family, according to Zillow.
“Buyers are buying together to address the affordability crisis,” Divongai said. “We also found that buyers are receiving help from friends, with half of first-time buyers receiving help from family or friends in the form of gifts or loans to help with their down payment.”
What home buyers need to earn to buy a home
Even people living in the cheapest metropolitan areas will need to earn more in 2024 to comfortably afford a home.
Pittsburgh is the most affordable metropolitan area, with buyers needing a median household income of at least $58,232 to afford a median-priced home. That was followed by Memphis, which required an income of $69,976, Cleveland ($70,048) and Birmingham ($74,338), according to Zillow.
Of the 50 U.S. markets, only three major cities are affordable to people with an average income of $81,000: Pittsburgh, St. Louis, and Detroit.
In contrast, there are seven markets in major metropolitan areas where potential buyers need to have an income of $200,000 or more to purchase a typical home. The top four are all California, with San Jose ($454,296) leading the way, followed by San Francisco ($330,864), Los Angeles ($279,250) and San Diego ($273,613).
Next was Seattle ($213,984), New York City ($213,615) and Boston ($205,253).
“In this environment, buyers first need to really get their finances in order,” Divongai said. “It's a good idea to start the search process early and get your credit history right. Doing so can save you thousands of dollars over the life of your loan.”
Gabriela Cruz Martinez I'm a personal finance and housing reporter for Yahoo Finance. Follow her on X @__Gabriela Cruz.
Click here for real estate and housing market news, reports and analysis to help you make investment decisions.
