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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 typical cadence usually sees a majority of metro areas sporting lower prices in the fourth quarter of the year.

February 25, 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 fourth quarter of 2021. 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.

While home prices continue on a strong upward path, the normal pattern for prices usually sees the highest costs attained in the second quarter of each year, a period which encompasses the traditional spring-summer homebuying "season". After that the median cost of a home sold starts to ease a bit, and by the fourth quarter of the year, it's common to see a majority of metro areas where the median price of a home sold is actually lower than in the third or second quarters of the year.

For example, in the third quarter of 2021, 12 of the 50 metros tracked by HSH saw a lower median price of a home sold than those in the second quarter of 2021. The fourth quarter improved on that a bit, and 28 of the 50 metros sported a lower median sales price than was seen in the third quarter. However, a year-over-year comparison that is the most common benchmark, and when looking at median home prices by this reference period, prices increased about 14.5% nationally, with annual increases that ranged from 3.64% in the Virginia Beach metro area to as much as 25.75% in the Austin, TX metro.

During the quarter, the benefit of seasonally-lower home costs was largely erased by firming mortgage rates, and in some cases even failed to offset it at all. Despite 28 metros with lower home costs during the period, this helped create lower income requirements in only 19 of them; higher mortgage rates offset the other nine. Overall, as compared against a year-ago period, the income needed to purchase a median-priced home in the fourth quarter of 2021 was considerably higher than in 2020, with increases ranging from "only" 5.8% in the Cleveland , OH metro to as much as 26.33% in the Phoenix, AZ metro area.

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

  $40,775.59

  2.       Oklahoma City

  $42,884.40

  3.       Cleveland

  $43,068.96

 

 Least affordable metropolitan areas

 Required salary per year to afford a median-priced home

  1.       San Jose

  $282,427.26

  2.       San Francisco

  $225,793.07

  3.       San Diego

  $144,599.79

The analysis also includes income calculations using a 10% downpayment and including PMI for each area.

Main takeaways from the updated research:

  • The fourth quarter of 2021 saw a slight relative improvement in affordability compared to the third quarter, with fewer quarter-to-quarter home price increases across the 50 metro areas we track, but mortgage rates that increased by nearly a quarter of a percentage point, reducing or erasing improvement.

  • Home prices continued their march higher. About half the of the top 50 metro areas sported lower median home prices in the fourth quarter than they had in the third quarter, but any declines only took back a portion of the significant increase in home prices tallied over the last year. Compared against the fourth quarter of 2020, median home prices were significantly higher; 38 metros show double-digit increases; eight of those were in excess of 20% with several nearly at this level.

  • Home affordability improvement was mixed. Compared to the third quarter of 2021, it cost less to purchase a median-priced home in 19 major metro areas in the fourth quarter. That said, and seasonal variations in home prices aside, it was considerably more costly to buy a median priced existing home in the fourth quarter of 2021 relative to the same period in 2020, with increases in incomes required ranging from 5.8% in the Cleveland-Elyria, OH metro area to as much as 26.33% in the Phoenix-Mesa-Chandler, AZ market.

  • Mortgage rates strode higher during the period. The era of pandemic-driven, rock-bottom mortgage rates is fading into the rearview mirror. In the fourth quarter of 2021, the par value for the 30-year fixed-rate we use in our calculations rose by 21 basis points (0.21%), the highest figure in the last six quarters. Higher mortgage costs joined with higher home prices will continue to challenge homebuyers, perhaps even more so when the spring homebuying season starts in 2022.

  • Any home price 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 fourth quarter of 2020 would have amounted to $63,140; one year later, and it'll take $72,340 to hit that level. A potential homebuyer would have had to accumulate another $766 per month ($178 per week) just to keep up.

  • Few houses area available to purchase. At the current rate of sale, the National Association of Realtors estimates that there were about 2.1 months of supply on average to meet demand in the fourth quarter. That's even less than was available during the third quarter (about 2.5 months) and well below normal levels, let alone the six months of supply thought to be optimal. The fourth quarter of the year is often the tightest for supply, as holidays and winter weather tend to keep some homeowners from putting their homes on the market.

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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