Becoming a homeowner has long been part of the American Dream. Unfortunately, buying a house right now has become something of an impossibility for many people. In fact, new research shows that the median-priced home is well out of reach for the typical American.
Here’s just how much you’d have to make in order to be able to afford a reasonably-priced home across the U.S., along with some tips on what to do if your earnings fall short.
According to Redfin, a home buyer purchasing a property in August of 2023 would have needed to earn an income of $114,627 annually in order to afford to buy a median-priced property.
To determine how much income home buyers would need to make to afford a house, Redfin calculated the monthly payment for a median price home purchased using a 30-year loan at the median interest rate with a 20% down payment. A home was considered affordable if housing costs were below 30% of a buyer’s income. With a median monthly payment of $2,866 in August, buyers would need to earn around $114,627 to afford it.
That is a 15% increase in the amount buyers needed to earn in August of 2022, even after adjusting for inflation. It is also a 50% increase in the income needed to be able to afford a median-priced home prior to the COVID-19 pandemic.
There are two primary reasons why people need to make so much money now to be able to afford to buy the typical home in the U.S.
Mortgage rates have climbed
While rates have eased over the last several weeks, it’s still very expensive to get a mortgage loan. While you could find home loans for 3.00% or less for a 30-year fixed-rate mortgage during the COVID-19 crisis, rates hit a two-decade high in October of 2023, with the average rate coming in at 7.57%. The higher mortgage rates are, the higher monthly payments will be, and the more money a person will need to make to be able to afford a home.
Home prices are high
Despite the fact that mortgages are so expensive and fewer people are buying houses, prices on properties (which climbed during the pandemic) haven’t really fallen, in large part because there are few homes for sale. People aren’t selling because they don’t want to give up their own low mortgage rates they locked in a few years ago.
This has driven the median home price to $420,000 as of August when the research was done, up 3% compared with the prior year. This is just $12,000 short of the all-time high median value. The more expensive a house is, the more you have to borrow from a mortgage lender, and the higher the payments will be.
Sadly, this combination of high home prices and high costs of borrowing both contributed to the fact home buyers must make $114,627 a year, which is $40,000 more than the typical household income.
Here’s what you can do if you don’t make enough to buy
If you cannot afford to buy the median-priced house, you have a few options. You can wait and hope mortgage rates and potentially home prices fall. Some experts do expect rates to drop in 2024, especially if the Federal Reserve (the country’s central bank) lowers the overnight rate at which banks can borrow from each other.
Lawrence Yun, chief economist at the National Association of Realtors, predicts rates could fall to between 6.00% and 7.00% by spring of 2024, and the Mortgage Bankers Association has a similar prediction, indicating they expect rates to end 2024 at 6.1%. Fannie Mae is a bit more optimistic, predicting rates will settle at around 5.7%. So there could be hope on the horizon.
You could work to save more money so you can put more down and borrow less, which would make your monthly payments more affordable on your income. Or you could buy a smaller, cheaper home that’s below the median value. This may not be possible in all markets, however.
The reality is, if your housing costs would exceed around 30% of your income, buying a home under the current conditions would be unaffordable and you’d need to choose one of these other options. That may be frustrating if you’re hoping to achieve the American Dream of homeownership, but you definitely don’t want to buy a house that you don’t make enough to afford.
