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:
After a long, strong run up over the last few years, it may be that home price gains have begun to cool. While that's good news for potential homebuyers in a sense, the ongoing sharp rise in mortgage rates that continued in the third quarter of 2022 has wiped out any of the beneficial impact on housing affordability of softer home prices, and the increase in rates re-intensified to start the fourth quarter.
The mortgage-rate climb has been consequential. Although the lift for rates in the third quarter of 2022 was "only" another 0.34%, this was enough to lift the working rate used in our calculations to 5.82%, the highest quarterly figure since the final quarter of 2008. At a time of record-high home prices, the combination of the two has quashed affordability, and unsurprisingly, home sales have continued on a downward trajectory.
Just how significant has the combination been? A year ago, an income of $67,921.08 would have been enough to buy a national-median priced home of $363,100 with a mortgage rate of 3.04%. In this year's third quarter, that income would need to be $95,716.69, a figure some 41% higher than last year at this time, and was needed to cover a $398,500 home using a rate of 5.82% (both income figures use a 20% down payment).
The impact of those higher rates is pretty stark: If mortgage rates had remained at last year's level (3.04%), the income required to buy this year's more expensive home would have been $73,273.69 -- a far more manageable increase for potential homebuyers.
Unfortunately, that's not the case. As well, smaller home price increases are still just that -- increases -- so while the salary needed to buy a home may be rising somewhat more slowly, it is still rising. That's especially the case when looking at year-over-year comparisons, but a quarter-to-quarter inspection looks perhaps a little different.
Home Price Trends
It's not uncommon to see somewhat lower home prices in the third quarter of the year compared to the second quarter. The typically hot "spring homebuying season" has now passed, and in typical years, this less- competitive period often sees sellers working a little harder to attract home buyers.
In "normal" years (well, pre-pandemic years) about half of the metros we track in our analysis saw lower home prices in the third quarter compared to the second. Even last year, when the housing market was still running quite hot, more than 20% saw typical seasonal softening. One exception was 2020: The "re-opening" (actually, simply pandemic-delayed) housing market saw all 50 metros we track post quarter-to-quarter home price increases, as buyer demand not able to be expressed in the spring worked its way into the summer and early fall period.
This year: 41 metros -- 82% of the markets tracked -- saw lower prices in the third quarter as compared to the second. We attribute some of this of course to typical seasonal slowing, but the breadth of lower prices was considerably wider than normal, and the amount of the change (a median decline of 2.89%) much deeper than any of the previous third-quarter periods where home-price declines have occurred.
Even among the market that did see still-rising prices, only one metro posted an increase of greater than 3% -- that would the Los Angeles metro area. This number one increase in the third quarter would only have been good enough to be 38th most (out of 50) in the second quarter, so even in metros where there were home price gains, they were considerably smaller than has been the case recently.
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 9.75% higher than a year ago; by the same reference, the prior four quarters saw 15.38%, 16.91%, 14.25% and 15.86%, respectively, so the latest period (although still quite high) is a considerable deceleration.
Home prices in some markets have risen so far and so fast that the potential for localized downturns in prices may be growing. Anecdotal reports are starting 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 a monthly basis, the national median home price peaked back in June and has been falling in each of the last three months, with a cumulative decline of about 7% over this period. However, 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.
Salary Situation
It would be nice if the somewhat lower home prices for the third stanza of 2022 improved affordability, but that's not been the case, thanks to rising mortgage rates. One component rising and one falling served only to keep costs about the same -- the salary needed to purchase the national median-priced home was $95,716.69, virtually the same as the $95,538.43 seen in the second quarter. That said, the income needed in either quarter was more than 40% higher than its comparable year-ago period, so the difficult period for homebuyers continues.
There were four metro areas where the income needed this year was 50% or more higher than during the same period last year; the market with the smallest year-over-year increase was the San Francisco metro area, but since that market carries the second highest home price in the areas we track, that pushed the required salary for a median-priced home there to $282,117.13 -- hardly affordable at more than three times the national-income requirement.
In addition to the four metros with income increase requirements of 50% or more, and 20 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 4.7% in the twelve months ended October, according to the Bureau of Labor Statistics -- they aren't even keeping pace with overall consumer price inflation (+7.7%) let alone still-rising housing costs. Using 5-year median family income estimates from the 2020 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 in the last two years, but even adjusting the census-derived incomes by 5% in each of the last two years still leaves half of the markets in unaffordable territory.
Even as more marginally-qualified borrowers are forced to exit the market, there remains enough demand from the remaining pool of potential buyers to keep upward pressure on prices for at least a time yet, at least on a national basis, and even if they should retreat a little further, the effect on costs of higher mortgage rates will erase any of that improvement and then some.
On the aggregate, potential homebuyers need a six-figure income to buy a median-priced home in 42% of the markets we track.
Inventory Issues
While the desire to buy a home hasn't likely changed at all, the ability of buyers to secure one continues to be damped. Even with the decline n the number of buyers in the market, there is still enough demand to keep home prices fairly supported, but we may be at a tipping point for this. However, the number of homes on the market continues to be very thin, so competition for available homes remains pretty strong, if waning.
At the going rate of sale in third quarter, the National Association of Realtors reported that there was about 3.2 months of supply available, a historically very lean level, but improved from the 2.6 months seen in the second quarter.
That said, the improvement in the ratio is due to declining sales, as the number of homes on the market has also been declining. The NAR noted a 2.3% monthly decline in listings in September (-0.8% year-over-year) and a 1.5% monthly decline in August, so demand for homes is simply falling faster than new listings declining, at least for the moment.
Even the improvement to 3.2 months up supply at the present rate of sale -- a figure now seen in each of the last three monthly existing home sales reports -- 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 soon, as the late fourth quarter is early first quarter usually sees the fewest homes up for sale, with holidays and winter weather impacting the housing market.
This year's leanest period for inventories may be even leaner than usual, too. 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 a 20-year high mortgage rate even if one can be found. For the seller, it also likely means giving up a record-low mortgage rate, too. 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.
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 $72,620 to meet that 20% requirement. This year? $79,700. That's another $7,080 -- or saving another $590 per month ($138.21 per week). That's just to keep pace with the increase, let alone saving up the previous $72,620, and of course high inflation for food, energy and essential items makes that 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 almost seven years just to reach today's 20% downpayment level; saving at twice that rate would make it three and a half 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 $11,955 and $13,948 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.
