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 would be nice to say that homebuying conditions were becoming less challenging, but that wouldn't be correct. The issue of few houses available to purchase actually has intensified a bit in the fourth quarter of 2021, although this likely more a holiday-season happenstance than not. What's also seasonal are the number of markets where the median price of a home sold actually declined during the fourth quarter of 2021 compared to the third quarter, but what's not seasonal is that mortgage rates legged higher during the closing stanza of 2021, a situation that has only worsened since the calendar turned to 2022.
The seasonal pattern in the data for home prices suggests that things are slowly returning to normal; that is, home prices seem to be back to posting their highest and broadest gains in the second quarter, followed by some markets settling back in the third quarter, then a majority of the 50 markets we track seeing lower median prices of homes sold to close the year. This was the pattern in place from 2016 until the pandemic distorted everything, but it appears this previous pattern has returned again. All it means is that homebuyers at the end of the year bought somewhat less costly homes in many areas than those who bought them in the July-September period.
This doesn't mean these purchases were inexpensive, though. In all cases, and even with some markets featuring lower median sales prices on a quarter-to-quarter basis, the income needed to buy a home has been marching higher across all 50 markets we track for the last three quarters straight (and except for a few markets in a couple of quarters, this string of income-needed increases has been running for six quarters in a row). This of course is caused by the effects of either higher home price or higher mortgage rates in a period, or both.
Home Price Trends
The normal seasonal pattern for home prices seems to be returning. Compared to the third quarter, the median price of a home sold in the fourth quarter of 2021 was lower in 28 of the top 50 markets we track. In 2020's COVID-distorted fourth quarter, that number was only 20, less than half the typical 40 or more metros that saw lower median home prices in the fourth quarter in the 2019-2016 time period. So the pattern seems to be normalizing, although it has a way to go be closer to normal. Perhaps something closer to normal will return later this year.
Although softer prices on a quarter-to-quarter basis might be good news for some homebuyers in some areas, the more popular reference is to compare home prices this year relative to a year ago. That comparison isn't as cheery for prospective home buyers, as annual increases in metropolitan median home prices ranged from a relatively manageable 3.63% in the Virginia Beach-Norfolk-Newport News, VA metro to as much as 25.75% in the Austin-Round Rock, TX area. Compared to last year's fourth quarter, thirty-six metro areas posted double-digit annual increases in median price; high-teens and 20+ percent increases were widespread, and only 14 metros had gains as "low" as single digits.
Salary Situation
With 28 metro areas seeing a decline in the median price of a home sold, you might be tempted to think that the annual income needed to buy a home you'd follow suit. Not exactly; in fact, only 19 metro areas saw quarter-to-quarter salary declines, and about half of those declines were meager, totaling less than $1,000. Rising mortgage rates erased the benefit of lower median prices of homes sold in nine metro areas.
As with prices, the most common reference point is the change versus a year ago; using this comparison, all 50 metros required higher salaries to buy a home, with increases needed ranging from 5.8% in the Cleveland-Elyria, OH metro area to as much as 26.33% in the Phoenix-Mesa-Chandler, AZ. It's safe to say that income growth is likely failing to keep up with rising housing costs in many metro areas. Even potential homebuyers receiving robust increases in salary would be hard-pressed to gain ground in many metro areas.
Inventory Issues
As has been the case for some time now, there remains little available to buy. Inventory levels of existing homes available to buy continues to lean out, partly due to a fairly strong rate of sale in the end of 2021, but also due to a lack of homes being put up for sale. Over the last three months of the year, stockpiles of homes for sales depleted further, sliding from 2.4 months of supply at the present rate of sale in October to just 1.7 months in December (January was even leaner, according to the NAR).
To a degree, inventories of homes for sale will likely replenish somewhat as the spring homebuying season comes along, as is normally the case as winter fades. With high home prices now accompanied by higher mortgage rates, it is certainly possible that demand for homes will be tempered a bit more than if conditions were more favorable. That may help inventories of homes build up a bit more than has been the case for several years, and should this occur, home price increases would become more tempered.
For now, that's a bit of wishful thinking, especially if you're a hopeful homebuyer. At least for the moment, there seems to continue to be more than sufficient demand to absorb any homes that do get listed for sale, even if mortgage rates and prices are higher that they have been. In general, the National Association of Realtors considers about 6 months of homes available (at any given annual sales pace) to be an optimal level of stock; we have not seen that level in closing in on 10 years, and even something closer to the "new normal" in the mid-4 month range would feel quite bloated relative to what the market has produced over the last couple of years.
Higher home prices and higher financing costs means potential borrowers will need both higher savings for a down payment and stronger incomes to cover their mortgage payments. Even if home prices should hold steady for a time -- an unlikely happenstance -- the impact of higher mortgage rates will drive salary requirements upward. Currently, and with a 20% down payment someone can purchase the hypothetical national median-price home of $361,700 with an income of $69,136.60; the mortgage of $289,360 would have a rate of 3.25%
With a mortgage rate of 3.5%, a level that is likely to be surpassed in the first quarter of 2022, the salary needed rises to $70,852,72 -- and if rates move to 4% (certainly possible, given inflation and likely Fed action this year) the income needed flares to $74,371.
Of course, it's not realistic to expect home price increases to halt, and even smaller increases will still require more cash to hold a given percentage-based down payment -- and income requirements will still be increasing.
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
Before we discourage any potential homebuyers any further, one point to consider in all of this is that we work from the median home price provided by the National Association of Realtors. The median means that half of the homes sold in the fourth quarter of 2021 had prices below these published values, and half above, so half the buyers would have found lower cost options available, lessening both the burden of the downpayment savings needed and the income required to own one of those homes.
As well, the average offered rates from Freddie Mac used in the majority of our calculations are just that: average. Borrowers who shop around for mortgage rates, take actions such as paying points to lower the rate somewhat and other considerations also would likely be able to do better than average, helping to keep costs more manageable. For first time buyers, being prepared, shopping around and getting preapproved are part of the essential steps to successful home buying.
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.
