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:
The deceleration in home price appreciation is continuing, and appears to be broadening, too. While it's not uncommon at all to see quarter-to-quarter declines in the median price homes sold in the fourth quarter as compared to the third, it is unusual that seasonal softening happened across all 50 metro areas we track in the fourth stanza of 2022.
Unfortunately, lower median prices for homes sold during the quarter couldn't overcome another significant increase in mortgage rates during the period. The 6.84% used in our calculations (a fee-adjusted Freddie Mac data averaged over the quarter) was the highest such quarterly interest rate since the second quarter of 2002, so more than a 20-year high for mortgage rates.
Compared to the third quarter of 2022, and despite lower home prices across the board, higher financing costs in place meant that potential homebuyers needed to make a higher income in order to buy a median- priced home in all but one market -- Austin-Round Rock, TX -- where the median price of a home sold in the fourth quarter was 11.58% less costly than one sold in the third quarter.
Higher mortgage rates and still-high home prices has been a challenging combination for potential homebuyers, many of whom have had to step back from the market to await more favorable conditions. Just how significant has the combination been? A year ago, an income of $69,525.56 would have been enough to buy a national-median priced home of $364,300 with a mortgage rate of 3.25%. In the fourth quarter of 2022, the potential buyer's income would need to be $102,838.65, a figure some 48% higher than last year at this time. This would cover a $378,800 home with a mortgage rate of 6.84% (both income figures use a 20% down payment).
Seasonal price declines notwithstanding, home prices are still close to record highs in many areas, and even if they should decline somewhat more from present levels, they will only likely be revisiting yesterday's record high levels. It will likely take either considerably lower prices or considerably lower mortgage rates to get the housing market moving above it's current sluggish pace.
Home Price Trends
On a quarter-to-quarter basis, the lowest median selling prices for existing homes usually occurs in the fourth quarter of each year. The fourth quarter of 2022 was no exception, and in fact actually expanded on the recurrence, with all 50 major metros we track showing lower selling prices in the fourth quarter than the third. Over the last seven years in which we've conducted this analysis (and not counting 4Q22), declines in excess of 80% of metro areas were seen in four of those years, with as many as 47 of 50 metros posting a decline in 2018.
The last couple of pandemic-distorted fourth quarters (2020, 2021) saw far fewer declines: just 40% in 2020 and 56% in 2021, so 4Q22's 100% rate is a change in the pattern to something more typical, albeit moreso. As well, across the 50 metros, the decline in costs was more pronounced at the end of last year than it has been over those last seven years. The average median decline in home prices across the 50 metros in the fourth quarter of 2022 was 4.97%. No other comparable fourth quarter that saw a majority of price declines across metros posted an overall drop of more than 3,19 percent.
So price declines were both broader and deeper than normal in the fourth quarter of 2022. These declines came on the heels of a third quarter where the data showed much the same - broader and deeper declines than is typical. Clearly, the market has shifted, and continues do so.
We like to look at the quarterly numbers as they may indicate the start of a trend or a change in the market that is starting to form. That may be the case this time. Most analysis looks at comparisons against a year ago, and in that regard, home prices are still rising pretty strongly, although with less vigor. Nationally, the median price of a home sold was 3.95% higher than a year ago; by the same reference, the prior four quarters saw 9.75%, 10.94%, 16.91% and 15.39%, respectively, so the latest period represents a considerable deceleration in the trend. During the last three months of 2022, home price increases on a year-ago basis were 6.5% in October, 4% in November and just 2.3% in December. With a seasonally slow period for sales, this monthly figure may turn flat or even turn into a year-over-year decline in the next month or two before the "spring homebuying season" helps prop up values again.
Home prices in some markets have started to soften for the last while and the potential for localized downturns in prices may be growing. Anecdotal reports continue to suggest that sellers are lowering asking prices in some areas, but it's too soon to see much by way of effect, at least on the most common annual comparison. That said, a handful of markets are showing year-over-year declines in prices, including some that more than boomed in the upturn. These include the metro areas of Los Angeles, San Francisco, Sacramento, San Jose, Detroit, Memphis and Austin TX. We'll have to wait to see if annual price declines continue to expand to other markets over the next couple of quarters.
At least on a monthly basis, the national median home price of an existing home sold in a given month peaked back in June and has been lower in each of the last six months, with a cumulative decline of about 11.3% over this period. While this may help some borrowers at the margins, only a combination of lower mortgage rates, rising incomes and level (or declining) home prices will see affordability improve much, and few folks likely want to see home values declining outright. That has caused a lot of economic trouble in the past.
Salary Situation
While softer and softening home prices are all well and good, even significant declines won't improve home affordability if mortgage rates continue to be at about 20-odd year highs.
Even with a quarter-to-quarter decline in the national median price of a home of almost 5%, the fresh leap in mortgage rates during the fourth quarter lifted the income needed to buy that home from $95,716.69 in the third quarter to $102,838.65 to close the year. A 5% discount on the home's price couldn't overcome the 19% increase in mortgage rates (a nominal 1.02 percentage points) that took place during the period.
Compared to a year ago, a prospective homebuyer looking to purchase that national median-priced home in the fourth quarter of the year would have had to had a salary that increased by 48% over that time, a rate of income increase that very few people would likely have attained. A year ago in the fourth quarter of 2021, $69,524.56 would have been sufficient to get the job done; this year, that potential homebuyer would need $102,838.65 to complete the same transaction.
There were eight metro areas where the income needed this year was 50% or more higher than during the same period last year. On a percentage basis, the smallest year-over-year increase in income needed was 31.25% in the San Francisco metro area; as that market carries the second highest median home price in the areas we track, that increase pushed the required salary for a median-priced home there to $296,358.15 -- hardly affordable at nearly three times the national-income requirement.
In addition to the eight metros with income increase requirements of 50% or more, 32 of the remaining 50 metros saw their required income rise in excess of 40%, too.
While incomes are rising -- average hourly earnings were up by 4.6% in the twelve months ended December, according to the Bureau of Labor Statistics -- they aren't even keeping pace with overall consumer price inflation (+6.4%) over that time, let alone still-rising housing costs. Using 5-year median family income estimates from the 2021 census, 30 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 further over the last year, but even adjusting the census-derived incomes by 5% to cover 2022 still leaves more than half of the markets in unaffordable territory.
Even as more marginally-qualified borrowers are forced to remain on the sidelines, there remains enough demand from the remaining pool of potential buyers to keep upward pressure on prices for at a time yet, at least on a national basis. Even if they should retreat a little further, elevated mortgage rates will continue to erase some of that improvement in affordability.
On the aggregate, potential homebuyers need a six-figure income to buy a median-priced home in 52% of the markets we track.
If there's any good news on the mortgage-rate front it's that the so-far peak for mortgage rates happened back in November, and the average rate for a 30-year fixed-rate mortgage slid from over 7% to close to 6% by late January. Of late, they are showing signs of kicking higher, though, as inflation remains more troublesome than hoped.
Those lower rates helped bring at least a few more folks into the housing fray. The NAR reported that their Pending Home Sales Index for December rose by 2.5%, breaking a six-month string of declines. Provided all those signed contracts make it to closing, we'd expect to see at least a minor lift in existing home sales for January or February.
Inventory Issues
While the desireto buy a home hasn't likely changed at all, the ability of buyers to secure one continues to be damped. Although there are far fewer buyers in the market now than there has been in some time, there is still enough demand to keep home prices fairly supported, especially as winter gives way to spring.
Buyer demand was damped by adverse market conditions in the late fall and early winter months. Even so, there were actually fewer homes for sale in December compared to November; the National Association of Realtors reported that total housing inventory registered at the end of December was 970,000 units, down 13.4% from November (although 10.2% higher than December 2021). Finding a home to buy remains a challenge.
Despite slower sales, the number of homes on the market continues to be very thin, keeping competition for available homes pretty strong, if waning somewhat. At the going rate of sale in fourth quarter, the National Association of Realtors reported that there was about 3.2 months of supply available, a historically very lean level, but at least unchanged from the third quarter. While still quite lean, the 3.2 months of supply was an improvement from the 2.1 months in the fourth quarter of 2021. Of course, sales during that period were about 48% higher than they were in the 4Q22.
Even though it is relatively improved, the average 3.2 months up supply at the present rate of sale isn't even back up to levels seen before the pandemic, let alone approaching levels considered optimal (something closer to six months of supply). Getting back to what might be considered "recently normal" of something around four months of inventory might put some additional downward pressure on home prices, but we're not likely to see that level of inventory anytime soon. The early first quarter of the year often sees the fewest homes up for sale as winter weather impacts the housing market, but this tends to improve somewhat as spring approaches. December's inventory levels, for example, thinned out to 2.9 months and history doesn't suggest that this will show much improvement for January (data due out later in this month).
Conditions remain adverse for potential homebuyers, but appear to be improving just a bit in the early part of 2023. However, getting more homes for sale into the market will continue to be a challenge. Someone selling a home usually needs to find another one, and a home seller right now faces the same issues as does a buyer -- it's hard to find a home at an affordable price, and it must be financed with an interest rate that is likely well above the one they are currently paying. The saving grace for some sellers is that they may be trading down; paying cash means avoiding the mortgage rate issue altogether (or a smaller mortgage means less impact on the budget), and those buying new construction don't face the limited inventory issue that continues to bedevil potential buyers of existing homes. As well, builders have been upping the ante on incentives to help move new construction.
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 $72,860 to meet that 20% requirement. This year? $75,740. That's another $2,880 -- or saving another $240 per month ($55.81 per week). That's just to keep pace with the increase, let alone saving up the previous $72,860, and of course high inflation for food, energy and essential items makes saving money more of a challenge than it has been in about 40 years.
Not to discourage folks, but if someone could save $1,000 per month, it would take them over six years just to reach today's 20% downpayment level; saving at twice that rate would make it about three years... but in either case, 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 $11,361 and $13,254 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.
