Quarterly Analysis: Salary Required to Buy a Home

Home prices are rising quickly, and mortgage rates have stopped falling, presaging a challenging spring homebuying market

February 25, 2021 - HSH.com, a trusted online resource for mortgage data, content and expertise released today its updated analysis of the salary required to afford a median-priced home in the top 50 metropolitan areas. 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.

In the fourth quarter of 2020, the revised research reveals that affordability improvements fostered by falling mortgage rates for much of 2020 have all but come to a halt, overwhemed by spiking home price gains. Just five metro areas saw minor decreases in the salary needed to afford a median-priced home. A year ago, in the fourth quarter of 2019, 49 markets saw lower salary requirements and improving affordability.

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

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

Main takeaways from the updated research:

• The fourth quarter saw another meaningful decline in mortgage rates, but it appears as though the long decline is coming to an end. The average rate used in the salary calculation was 27 basis points lower (0.27%) in the fourth quarter than in the third, and close to a full percentatge point lower than year-ago levels.

• Home prices are skyrocketing. Across the 50 major metros, the median year-over-year increase in the price of homes sold was 14.86%, with the highest gain in the group a significant 20.07% rise in the Phoenix metro area. Among the group, the smallest annual gain was "only" 8.33% in the Pittsburgh metro. It was one of only two markets to have a single-digit increase; all others showed double-digit gains.

• Home affordability is a challenge, and one that is increasing. Also increasing is the difficulty in finding a suitable home at any price. Supplies of existing homes to buy continued to dwindle during the fourth quarter of 2020, falling from 2.5 months of supply at the then-present rate of sale in October, to 2.3 months in November and a razor-thin 1.9 months in December.

• The falling mortgage rate offset to spiking prices is coming to an end. So far in the first quarter of 2021, now at a little past the halfway mark, there has been no decline in the fee-adjusted interest rates we use in our calculations -- the current quaterly running rate for the conforming 30-year FRM is unchanged from the fourth quarter.

• Sharply rising home prices make saving for a downpayment and closing costs even more challenging. The continued strong increase in home prices means that a fixed-percentage down payment (such a the 20% we use in our base calculations, or even 10% with PMI, found on each metro-area panel) must necessarily be larger, and therefore harder to attain. For example, the current quarter's $315,900 median home price means a 20% down payment of over $63,000 (and 10% down still means more than $31,000 in cash must be available). These amounts are of course before any mortgage closing costs, funding for reserves and escrow accounts and the like are taken into account.

• The spring homebuying market will be tempered by these factors. While there remains plenty of demand in the market, highly limited supplies of homes in the hottest metro areas will continue to put upward pressure on prices, and the combination of higher savings needed to cover a down payment and decreasing monthly affordability will likely start to trim some more marginal buyers from the market. Sales may struggle to improve from current levels, and seem more likely to throttle back to a degree.

We discuss all these items and more 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.