See below exactly how much salary you would need to earn in order to afford the principal, interest, taxes and insurance payments on a median-priced home in the 50 most populous metropolitan areas.
Key takeaways:
It feels like we're closing in on a point where a question needs to be asked: "When will higher costs stall the housing market?"
There's no clear answer, and probably not one that actually fits everywhere, but in the aggregate, it appears that this point is approaching. In just the last two quarters, mortgage rates have climbed more than two percentage points, reaching their highest point in about 13 years, and home prices continue to climb at a minimum of double-digit rates everywhere.
The combination of those two factors means that the income needed to buy a home is rising quickly, too. A year ago, in the first quarter of 2021, a homebuyer purchasing the national median-priced with a 20% down payment home needed $61,397.53 in order to qualify for a $254,650 30-year fixed rate mortgage with an average rate of 3.04%
Just four quarters later, a homebuyer looking to buy that same national median-priced home of $369,200 required a mortgage of $294,560 after a 20% down payment. At an average interest rate for a 30-year FRM now 4.01%, this typical borrower needs an annual income of $75,507.75 -- 22.98% more income than just a year ago.
Things have gotten no better since the first quarter ended more than six weeks ago, either. We of course don't know what's happened to home prices for the second quarter, but mortgage rates have already risen by another percentage point since then and home prices are still running at close to a 15% increase over year-ago levels.
In some markets, the salary increase needed to keep up was in excess of 30%; places like Jacksonville FL, Atlanta GA, Phoenix AZ, Nashville TN, Raleigh NC, Salt Lake City UT and Las Vegas, NV all became strikingly less affordable than a year ago. There are plenty of other metro areas sporting increases between 20% and 30%, too, so decreasing affordability isn't a here-and-there phenomenon, either.
Mortgage rates may or may not continue to rise much from here, and certainly, home price increases could cool or even stall. However, unless mortgage rates or prices actually start to decline, affordability won't start to improve for many until income growth catches up.
Home Price Trends
Homeowners continue to cheer on strong home price gains, and why not? The average of the three monthly home-price increases in the first quarter was another 15.3%, so those with homes are building equity quickly. Conversely, those hoping to buy homes are considerably less happy; home prices at record levels and the potential for slower sales markets ahead could mean both buying at a elevated price and facing the prospect of more meager appreciation-based equity gains in the coming years.
The first quarter of the year is usually the second slowest homebuying period of the year, with the holiday-filled fourth quarter of the year often seeing the greatest number of markets with lower median home prices. In typical fashion, and on a quarter-to-quarter basis, there were 14 metros in the first quarter where the median price of a home sold was lower, half the number seen in Q4. Even with lower costs in these markets, the median value of a home sold across the 50 metros we track increased by 2.81%, an outsized gain relative to the same periods in each of the last four years.
Regardless of quarterly moves, home price increases compared to a year ago ranged from 2.82% in the wintry Milwaukee WI metro area to 28.78% in the warm Tampa FL market, one of 13 metros with median price increases in excess of 20% compared to year-ago levels. Just 13 metros had increases in the single digits, so 37 metros saw annual home price increases of 10% or more, with the national median increase 15.71% for the period.
Salary Situation
As note in the intro, the income needed to purchase a median-priced home continues to rise sharply everywhere. We often reference percentage increases, but these translate into real dollars. The 31.88% increase in Atlanta, GA? This means a prospective homebuyer there needed $16,828.53 more income this year than last to cover the median-priced home, although still a relatively affordable $69,618.50 per year. The 38.38% increased needed in Salt Lake City, UT? $28,006.88 per year more in income needed, so now homebuyer would need $100,970.01 to buy a median-priced home. Three years ago? Buying a home in the Atlanta metro area would have required $48,309.87; in the Salt Lake City market, "only" $66,374.98.
It's fair to say that incomes are also rising, although not by enough to offset these significantly increased requirements. Using 5-year median family income estimates from the 2020 census, 18 of the 50 metros we track would be considered unaffordable, or at least the income required exceeds the metro income reported in the last census. Now, incomes have risen in the last two years, but the income differential in most cases is pretty wide and the gap between the two unlikely to have been narrowed very much even with sizable increases in salary over that time.
All that said, demand for existing homes continues to far outstrip supply, but this is changing somewhat. Affordability issues of course affect marginal borrowers first and most profoundly, and these folks are likely existing the housing market at a rapid pace this spring. Still, that leaves a fairly sizable group of folks with reasonable means still participating in the housing market despite higher purchase and monthly carry costs. Supply is only slowly improving, and suppressing demand (though higher costs) is the only way to eventually cool home price hikes and allow salary increase some time to catch up.
Inventory Issues
As has been the case for years now, there is little for potential homebuyers to actually buy. At the going rate of sale in first quarter, the National Association of Realtors reported that there was about 1.8 months of supply available, a historically very lean level. That said, the trend improved as the quarter progressed, moving from 1.6 months tin January to 1.9 months in March (since improved to 2.2 months for April).
Still, these figures remain well below levels considered optimal (something closer to six months of supply) or even what might be considered "recently normal" of something around four months of inventory. Outside of the hard-stop initial months of the pandemic, we've not seen even four months of supply since Summer 2019; the last time the sales to inventory ratio was even 5 months was about six and a half years ago (November 2015) and "optimal"? You'll have to trek back to August 2012, when the housing market was just barely starting to recover from the last housing bust (home values in most markets hit their nadir in 2011). The median price of a home sold back then? A relatively cheap $184,900 -- less than half of today's median price.
How much house will your income and debt-load support? You can run your own calculations with HSH.com's How Much House Can I Afford to Buy? calculator.
Downpayment Difficulties
We've noted before that it's not just the increase in incomes that present a challenge to buyers, although this is significant. What's perhaps more challenging is that amassing a downpayment becomes even more challenging as potential homebuyers are forced to chase after an ever-moving target. Saving up enough funds for a downpayment and closing costs is always difficult, particularly for first-time homebuyers, and this challenge is compounded today by overall inflation eating up more dollars that might have otherwise been saved.
Consider that a year ago a buyer looking to make our assumed 20% down payment on a median-priced home would have had to accumulate $63,640 to meet that 20% requirement. This year? $72,140. That's another $8,500 -- or saving another $708.33 per month ($164.72 per week). That's just to keep pace with the increase, let alone saving up the previous $63,640.
Not to discourage folks, but if someone could save $1,000 per month, it would take them six years just to reach today's 20% downpayment level; saving at twice that rate would make it three years... and by then, the downpayment goal post will surely have moved again.
Even someone looking to get in with a minimal 3% downpayment -- available on Fannie Mae's HomeReady and Freddie Mac's Home Possible programs (and 3.5% down for FHA-backed loans) would need $10,821 and $12,625 respectively. This would shorten the savings timeframe, but a smaller downpayment on that same median-priced home means both a larger loan amount and incurring mortgage insurance costs -- so a higher income is actually required to qualify. If you're thinking of going with one of these low-downpayment options, you'll want to see how these choices will work over time by using HSH's Low Downpayment Mortgage Comparison Calculator. You'll be able to see the costs of non-cancelable FHA mortgage insurance against the cancelable PMI costs of Fannie and Freddie offerings over any time horizon you desire.
A housekeeping note related to the data for this quarter: The Pittsburgh metro area median home price data provided by RealStats is again preliminary and subject to future revision.
Potential homebuyers of more modest means looking to buy homes often struggle to come up with even a minimum downpayment and closing costs, especially in heated markets. Help making the jump to homeownership is often available but is tricky to find if you don't know where to look. To help would-be homebuyers, HSH offers its database of Homebuyer Assistance Programs by state, where information about these valuable programs, vital website addresses, contact info and more can be found.
