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With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

With the Income You Need to Buy a Median-Priced Home rising, you may need to Learn About Adjustable Rate Mortgages to preserve affordability.

Quarterly Analysis: Salary Required to Buy a Home

The income needed to purchase a median-priced existing home continues to increase, even as a more normal pattern for home prices seems to be returning. The first stanza of the year often features lower median prices of homes sold in some markets; this was the case in 1Q22.

June 8, 2022 - HSH.com, a trusted online resource for mortgage data, content and expertise updated its analysis of the salary required to afford a median-priced home in the top 50 metropolitan areas for the first quarter of 2022. The report uses the latest quarterly home price data from the National Association of Realtors (NAR), incorporates local property tax and homeowner’s insurance costs, and calculates the income needed to qualify for a median-priced home in each market.

Rising home prices and rising mortgage rates as impinging on affordability at an increasing rate, and the housing market is beginning to slow as a result. In a typical seasonal pattern, 14 metro areas reported lower median sales prices in the first quarter of 2022 compared to the fourth quarter of 2021. However, compared to the same period a year ago, all markets saw home price increases that ranged from a modest 3.46 percent in the Detroit-Warren-Dearborn, MI metro area to as much as 28.78% in the Tampa-St. Petersburg-Clearwater, FL metro area.

Rising home prices have been accompanied by strongly rising mortgage rates this year, with the fee-adjusted quarterly average 30-year fixed-rate mortgage used in this quarter's calculations up by more than three-quarters of a percentage point. Higher rates and higher prices saw the salary needed to qualify to buy a median priced home increase across all markets we track, with these income requirements far outstripping aggregate income gains.

Required increases in salary for 1Q22 compared to the same period last year ranged from 11% in the Milwaukee-Waukesha, WI metro area (still a relatively affordable market, requiring just under $66,000 in income) to over 38% in the Salt Lake City metro area, where the median income needed to cover the principal, interest, taxes and insurance on a median-priced home has reached almost $101,000.

The affordability situation doesn't seem likely to improve much, if at all. Even with higher rates and higher prices, there yet remains more demand for homes than supply. Demand is diminishing to a degree as more marginal borrowers are priced out or can no longer qualify to purchase available properties, but for the moment there's not enough housing supply to meet demand even with a diminished pool of potential homebuyers. As such, home prices will likely remain well supported in the aggregate, but there could be some softening or reductions in asking prices for some properties in some markets before long.

The most and least affordable metro areas in the salary analysis (assuming a 20% downpayment):

 Most affordable metropolitan areas

 Required salary per year to afford a median-priced home

  1.       Pittsburgh

  $42,858.07

  2.       Oklahoma City

  $45,299.47

  3.       Cleveland

  $45,448.11

 

 Least affordable metropolitan areas

 Required salary per year to afford a median-priced home

  1.       San Jose

  $330,758.29

  2.       San Francisco

  $249,685.02

  3.       San Diego

  $166,828.39

Salary calculations using a 10% downpayment and including PMI are also provided for each area.

Main takeaways from the updated analysis:

  • The first quarter of 2022 saw a worsening in affordability compared to the third quarter, with half as many quarter-to-quarter home price declines across the 50 metro areas we track. As well, mortgage rates increased by nearly three-quarters of a percentage point, further impacting affordability.

  • Home prices continued their march higher. About one-third of the top 50 metro areas sported lower median home prices in the first quarter of 2022, about the same as was seen in the same quarters a year and two years ago. Seasonally-lower median home prices in some areas in the latest quarter doesn't much change the picture, and home price increases compared to the first quarter of 2021 were as high as 29%.

  • Home affordability declined furing the period. Incomes needed to purchase a median-priced home rose considerably from the fourth quarter of 2021; the most modest increase was $828.32 (Detroit) with the most substantial increase seen in the nation's most expensive housing market (San Jose, CA), where buyers needed $48,331.03 more income this quarter to buy a median-priced home of $1,875.000 compared to just three months ago -- and this would be financed with an interest rate for a jumbo mortgage that was lower than its conforming 30-year counterpart.

  • Mortgage rates leapt higher during the period. Rock-bottom mortgage rates faded further into the distance in the first quarter of 2022, rinsing by 0.76% for a conforming 30-year FRM (0.5% for a jumbo 30-year FRM). Since the quarter came to a close back at the end of March, mortgage rates have trekked higher, pressing over the 5% mark my mid-April and remaining there since. This will of course impact mortgage payments and further reduce affordability in the second quarter.

  • Rising home prices increases mean the need for greater savings to keep up. Ever-rising home prices increase the difficulty of saving for a downpayment to buy a home. The 20% we use in our base calculations (or even 10% with PMI, found on each metro-area panel) are increasingly unattainable, even for diligent savers. A 20% downpayment for a median-priced home (national) in the first quarter of 2021 would have amounted to $63,640; one year later, and it'll take $73,640 to hit that level. A potential homebuyer would have had to accumulate another $827 per month -- $192 per week -- just to keep up.

  • There remains little available to buy. At the current rate of sale, the National Association of Realtors estimated that there were about 1.7 months of supply on average to meet demand in the first quarter. That's even less than was available during the fourth quarter (about 2.1 months) and well below normal levels, let along the six months of supply thought to be optimal. The first quarter of the year is often the second tightest for supply, as winter weather tends to keep some folks from putting their homes on the market. The number of homes for sale often begns to improve as the weather warms and the traditional "spring homebuying season" brings out potential buyers.

These items and other observations are discussed in greater detail in the “Key Takeaways” component of the report.

With affordability on the wane, potential homebuyers of more modest means looking to buy homes may struggle to come up with a down payment 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 potential 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.

Find the lists here for the 25 most expensive and 25 least expensive metropolitan areas with display maps for each list.

Since 1979, HSH.com has been a trusted mortgage resource for consumers seeking independent, objective and expert-level information, forecasts and data. HSH.com offers unique analysis, calculators, tools and content to help demystify first mortgages, home equity loans and lines of credit, reverse mortgages and more. HSH.com empowers homebuyers and homeowners to fully understand their home financing choices and provide opportunities for them to engage with partners to execute their transactions. Keith Gumbinger, mortgage expert and vice president of HSH.com, is available for interviews at your request.

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