See below exactly how much income 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 second quarter of 2024 saw a marked deterioration in home affordability as the period featured the highest home prices of the year while mortgage rates firmed up again.
The height of the spring homebuying season happens during the second quarter, usually bringing with it some increased demand and the highest seasonal home prices of the year. We did see that again this year, but with a twist: sales of existing homes actually declined during April-June period, downshifting from a 4.22 million annual pace in March to 4.14 million in April, 4.11 million for May and finally 3.89 million for June. Usually, when demand falters, home prices have trouble maintaining traction, but that wasn't the case this time, On a monthly basis, the median selling price of an existing home moved from $406,600 in April, $417,200 in May (a new record) and to $426,900 for June (another new record).
While lower mortgage rates will eventually help improve affordability, it's hard to expect them to decline in the near term to levels that can provide an offset to record high home prices. As well, any decline in mortgage rates won't occur in a vacuum, and lower rates will likely release at least some pent-up homebuyer demand. This alone will likely be enough to keep prices more firm than they would otherwise be, blunting typical seasonal home price declines.
The Federal Reserve is expected to soon begin to trim the short-term interest rates it controls, and given a recent financial-market swoon, some investors are calling for rate cuts to come more quickly and in more sizable blocks. Whether that will occur is unknown; it's more likely that at least for the foreseeable future, the Fed will likely cut rates slowly and cautiously unless there are increasing signs of economic malaise.
With their leveraging effect, lower mortgage rates are more important in the affordability calculation than are lower home prices. In the current "national" calculation, buying a $422,100 median home price with a 20% down payment ($337,680 loan amount) using a 30-year mortgage with a rate of 7.00% requires an annual income of $114,019.34 to qualify once typical tax and insurance costs are included. Even if we adjust the Census Bureau's most recent 5-year running estimate of family income (American Community Survey, 2022) by 4% for 2023 and another 4% for 2024, this only lifts the income figure to a little over $100,000, well short of the income needed to buy that median-priced home (at least nationally, as if such a home existed).
To start August, mortgage rates dropped about a half-percentage point from the quarterly values we used in our calculations. However, even if rates were a half-point lower during the second quarter, this would only lower the annual income needed to purchase that median-priced national home to $109,209.65 -- helpful, but hardly much improvement.
Outside of a major change in the economy, to current buyer demographics or a huge shift in the supply of available homes for sale, it's simply not likely that home prices will decline in the aggregate or by very much, even if a few markets do seem to be settling somewhat. At best, buyers can hope that price increases flatten out over time while their incomes rise and mortgage rates decline at the same time, so that more balanced buying conditions emerge. When these components might come together in beneficial fashion is anyone's guess at this point, but it doesn't seem likely we'll be seeing them any time very soon. Only time will tell.
That said, it's worth considering if the second quarter of 2024 might be the nadir for home affordability. Mortgage rates are a little lower in the third quarter than in the second already. Seasonal median home price softening will soon return, and incomes have been rising. Looking forward, mortgage rates seem poised to begin a long decline; increased inventory of homes for sale should help limit price increases as we go, and provided there is no recession, incomes should continue to increase. All should help close the affordability gap over time, but the change may be more of a rounded peak on a graph rather than a spike.
Home Price Trends
The second stanza of each year usually features the highest median home prices, and that certainly was the case in the second quarter of 2024, as they reached new record highs.
Looking at the 1Q-2Q price transition in the first half of 2024, all of the top 50 metros saw higher home prices. On a quarter-to-quarter basis, seventeen metros sported double-digit increases, and the median quarterly increase across all markets we track was over 7%.
The home price news was little better on an annual basis, at least from a homebuyer perspective. While there were three metro areas where home prices were lower this year than last -- Denver CO, Cleveland OH and San Antonio TX -- the declines were modest in the first two (0.68% and 1.31% respectively), but somewhat more considerable in San Antonio (-3.68%). For the other 47 top housing markets, prices powered higher; six markets posted year-over-year double digit increases, and the median increase across the top 50 metro housing markets was 5.13%.
Even as home prices moved to record levels, there were some signs of less-strong appreciation to be seen in a handful of markets, mostly in Texas. Dallas, Houston and Austin all saw home prices rise by less than a percentage point, with the median sales price in Austin increasing by just 0.04% compared with a year ago. Memphis TN also rose by a modest 0.45%, and Portland OR and New Orleans LA both saw increases of less than two percentage points compared to the second quarter of 2023. so housing inflation in these areas has cooled considerably.
While that's not to say that home prices are lower or even more affordable, it does suggest sizable price increases are no longer sustainable in at least some markets... put another way, it may be an indication that home prices may have topped out in those areas.
Salary Situation
Resurgent home prices and higher mortgage rates mean a higher income needed to qualify to buy a median-priced home. In this case, more isn't better.
A prospective homebuyer looking to purchase the hypothetical "national" median price home needed an income of $114,019.34, some $8,717.45 more than in the first quarter of 2024, and 8.28% more income this year than in the same period a year ago. The leap in home prices and firmer mortgage rates during the period saw considerable flares in income requirements across the board, even in places where home prices eased a bit. The quarter-to-quarter bump in income requirements ranged from $2,937.73 in the Cleveland OH metro area all the way up to $80,574.64 in the San Jose CA area, the nation's most expensive housing market, where the median sales price topped two million dollars this quarter. With increases such as these and everywhere in between, it's little wonder that sales of existing homes tailed off during the second quarter.
Looking over the more common year-over-year reference, even the San Antonio TX metro area -- where home prices were lower compared to last year -- saw the income needed to buy a local median-priced home increase by 3.19%, and this was the smallest required income increase of the entire group. More that half the markets saw income requirements increase by 10% or more compared to the second quarter of 2023. As annual wage gains over the last year have been running somewhere in the low 4% range, the combination of home price increases and higher mortgage costs have far surpassed the ability of a typical income to cover rising housing costs. The knowable result of this? Flagging home sales.
Inventory Issues
The housing market may or may not be at the start of a tipping point, but slackening sales and a somewhat greater willingness of homeowners to put their homes up for sale is starting to change the picture a bit.
Inventory levels of homes available to buy are measured against the present rate at which they are selling, called an inventory-to-sales ratio. While useful, this measure can be misleading, since a fall off in demand -- such as might happen when mortgage rates suddenly or continually rise -- can bloat the figure upward even if no additional homes for sale come to market. That said, the National Association of Realtors reported that in June (latest sales month as of this writing) there were 23.4% more homes for sale this year than last, some 1.32 million units. This lifted the inventory-to-sales ratio to 4.1 months, the highest it has been in more than four years.
It is said that the "lock-in effect" -- homeowners unwilling to sell and trade a low-rate mortgage for a higher one -- is a key factor in why there are so few existing homes for sale. While that is likely true, it's also true that home prices are also significantly higher now then they were over the last couple of years, and there's a reasonable likelihood that many wanna-be sellers would have difficulty qualifying for today's more expensive homes even if mortgage rates were measurably lower. Even a being able to make a large downpayment on a next home might not be enough to even keep the amount being financed the same, let alone lower, so there is no offset to (or relief from) the higher mortgage rates in the market today compared to a few years ago.
Even if they can meet the challenge presented by higher rates and higher home costs, sellers may face the same nothing-desirable-to-buy situation that buyers without homes face, and so must wait until conditions become better balanced for their needs. It's not quite a chicken-or-the-egg situation, but a combination of smaller step up in mortgage payment (either lower rates or prices, or a combination of both) or more suitable or viable homes to buy at present prices is going to be needed over time to restore a more properly functioning existing housing market.
At least one saving grace for some sellers is that they may be able to explore avenues that have fewer barriers and better actual availability of homes for sale. For example, a seller looking to buy new construction doesn't face the limited inventory issue that continues to bedevil potential buyers of existing homes, and for that, many builders are offering price concessions and even financing assistance. Folks relocating away from crowded coastal real estate markets may also find better availability and value opportunities, too.
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
Potential homebuyers chasing today's markets know the problem all too well. Rising home prices mean greater amounts of savings are needed to achieve even a small downpayment. Our calculations use a 20% down payment as a base, since this eliminates the complication of factoring for the costs of Private Mortgage Insurance, where premiums are dictated by the borrower's credit strength, size of the borrower's downpayment and choice of mortgage type and term.
Want to buy the first quarter's national median-pried home with a 20% down payment? You'll need to have amassed $84,420 in savings -- and this leaves out the need to accumulate funds for mortgage closing costs and any required reserves. Even for a highly diligent saver this amount will likely take years to amass, and by then, higher home prices will likely necessitate an even larger amount.
Since home prices are higher this quarter than last (let alone last year), the downpayment size has increased by more than nearly $6,600 in just the last three months, so even a diligent saver would have had so come up with a lot more money in short order just to keep pace with price gains.
Not to be discouraging, but if someone could save $1,000 per month, it would take them now seven full years just to reach today's 20% downpayment level; saving at twice that rate would make it about three and a half years... but in either case, the downpayment goal line will surely have moved, again as home prices tend to rise with inflation over time.
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 $12,663 and $14,774 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. We take into account risk-based loan-level pricing adjustments, too.
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 can be 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.
