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 housing market has been slowing now for months under the weight of decreasing affordability, which worsened in the second quarter of 2022. Here's hoping that the latest quarter was the peak of the misery for potential homebuyers.
Already record high home prices continued their upward climb during the period, continuing to challenge homebuyers, but it was the significant jump in mortgage rates during the quarter that has done more appreciable damage to demand.
In the first quarter, the average rate for a conforming 30-year FRM (adjusted to par, a zero-point level) that we use in our calculations was 4.01%. For the second quarter, this has leapt up to 5.48%, with the 1.47 percentage-point increase representing a 36.4 percent increase in the interest rate when compared to the first quarter. It's safe to assume that few homebuyers saw incomes rise enough to cover this kind of a leap in costs.
A year ago in the second quarter, an income of $68,003 would have been enough to purchase a national median-priced home. Fast forward four quarters, and this income requirement has leapt to $95,694, almost 41% more than a year ago. You can see prior calculations and quarterly reference points in the archive section at the bottom of the display page.
Although less of an abrupt increase on a quarter-to-quarter basis, the income needed to buy a home in the second quarter of 2022 compared to the first was still up by 25.7%, rising from $76,130 to $95,694. With a change such as this, you would expect existing home sales to cool, and they have, falling from a 6.49 million annualized rate to start the first quarter of this year to a 5.11 million rate to end the second quarter. With conditions not improved, existing home sales have slumped further since.
While our analysis doesn't include sales of newly-constructed homes, the story is much the same for that segment of the market, too.
Home Price Trends
The second quarter of the year is usually the strongest in terms of sales and home prices. After all, it's the traditional spring "homebuying season", with families often looking to secure a new residence so that moving and settling in can happen before the start of the next school year. In a year when inflation pressures have repeatedly made headlines, perhaps lost in the shuffle has been the outsized inflation in home prices, which rose by 14.2% compared to the second quarter of 2021.
Even with diminishing sales activity over the last quarter, prices of existing homes have continued to climb, rising nationally by 11.6% compared to Q1. In typical seasonal fashion, all markets we track saw price increases on a quarter-to-quarter basis, ranging from "only" another 1.33% in the San Jose metro area (the most expensive metro) to as much as 22% in the Milwaukee metro area, a metro among the most affordable.
Across all 50 markets we track, the median quarterly increase was 11.16%, so hefty home price increases are still with us despite slower conditions and fewer sales taking place. The quarter-to-quarter increase was similar to that seen in 1Q21-2Q21, but rather than the percentage change, it's the dollar amount increase that concerns homebuyers. Last year's median home price of a (then-pricey) $357,700 seems relatively affordable compared to this year's $413,500.
While very expensive markets (or those that have seen a long string of price gains) seem ripe to have prices cool or even settle back somewhat, some smaller or less-costly markets racked up impressive increases in the latest quarter. These include the metro areas of Detroit, where home price increases were 20.86%, St. Louis (+19.06%), Cleveland (+17.07%) and Oklahoma City (+17%) just to name a few. Some of these smaller and less-costly metros are attracting folks who can work from home and are looking to escape unaffordable housing markets.
Salary Situation
As noted in the intro, the income needed to purchase a median-priced home continues to rise sharply everywhere. Across the 50 metro areas we track, the median increase in income needed to buy a home in the second quarter of 2022 was almost 40% compared to last year. Even in a calculation where half the markets were below this and half above it it's hard to find much by way of relief. At "just" 27.68%, the "smallest" such income increase happened in the Chicago metro area; at the high end of the spectrum was the Salt Lake City area with a whopping 57.11% increase in income needed to cover the cost of a median-priced single-family home. This metro saw a rise from $81,358.85 a year ago to $127,819.09 for the first quarter of 2022.
There were three other markets with 50%+ increases, and 20 of the 50 metros saw their required income rise in excess of 40%, too.
While incomes are rising -- average hourly earnings were up by 5.2% in the twelve months ended July, according to the Bureau of Labor Statistics -- they aren't even keeping pace with overall consumer price inflation (+8.5%) let alone fast-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.
Prices are rising as demand for existing homes continues to outstrip supply, but this is changing somewhat. More homes for sale have been coming onto the market, the National Association of Realtors reported that there were 1,310,000 homes for sale in July, an increase of 4.8% compared to June, matching inventory levels of a year ago. The 3.3 months of supply at the present rate of sale is the thickest inventory level in two years.
Even as more marginally-qualified borrowers exit the markets, 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. 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. The NAR reported that home prices retreated a slight bit in July compared to June, but that doesn't much change the affordability equation at this point. 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.
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 2.6 months of supply available, a historically very lean level, but improved from the 1.8 months seen in the first quarter. As was the case then, the trend improved as the quarter progressed, moving from 2.2 months in April to 2.9 months in June (since improved to 3.3 months for July).
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 $71,540 to meet that 20% requirement. This year? $82,700. That's another $11,160 -- or saving another $930 per month ($216.27 per week). That's just to keep pace with the increase, let alone saving up the previous $71,540.
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... 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 $12,405 and $14,472 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.
