Housing costs in the United States have been skyrocketing, outpacing median household incomes and creating a significant affordability crisis. According to a recent analysis by Redfin, the typical household in the U.S. needs to earn $113,520 a year to afford the median home price. This is a whopping 35% more than the typical household’s annual income of $84,072. Chen Zhao, a senior economist at Redfin, highlighted that affordability has collapsed dramatically since the onset of the pandemic, with a deficit in household earnings compared to housing costs persisting since February 2021.
One of the major factors contributing to the affordability crisis is the high mortgage rates that peaked in October 2023. At that time, buyers needed an average income of $120,500 to afford a home, creating a deficit of $40,810 for the average household. Additionally, the high median sale price for homes, reaching $412,778 in February 2024, further exacerbates the challenges faced by prospective homebuyers. The U.S. Department of Housing and Urban Development sets the affordability standard at 30% of household income, highlighting that the average household falls short by significant margins when it comes to affording a home.
The tightening inventory in the housing market, combined with high home prices, has forced potential buyers to the sidelines. Jeff Ostrowski, a housing analyst at Bankrate, mentioned that seasonal pricing fluctuations may contribute to some relief in the winter months, but overall, buyers are cautious. Veronica Fuentes, a certified financial planner, pointed out that recent layoffs in sectors such as technology have made prospective buyers more apprehensive about committing to a mortgage. The need to have significant emergency savings in place in case of job loss has also added to the hesitance among buyers.
Seeking Alternatives
With the escalating costs of median-priced homes, experts suggest that price-sensitive buyers consider investing in starter homes. These homes, falling in the lower price range of the housing distribution, are more affordable for those making around $76,000 a year, significantly lower than the $113,520 required for median-priced homes. However, finding starter homes has become increasingly challenging, as homebuilders have shifted away from constructing entry-level properties in recent years. The availability of affordable housing options has decreased, making it harder for buyers to break into the market.
Regional Disparities in Affordability
While the overall affordability crisis looms large, there are regional differences in affordability that offer some hope for prospective buyers. Redfin identified 13 metropolitan areas where buyers can afford a typical home without earning a six-figure income. Cities like Detroit, Cleveland, and Pittsburgh have lower income requirements for affording a median-priced home, making them more accessible to a broader range of buyers. However, experts caution that affordability remains a significant challenge, and buyers should carefully consider their financial circumstances before making a purchase.
Looking ahead, experts predict that borrowing costs may decrease as the Federal Reserve adjusts interest rates. Additionally, as inventory levels increase, home price growth is expected to taper off, providing some relief to potential buyers. The recent uptick in new listings indicates a shift in the market dynamics, with more inventory becoming available. However, caution is advised, as market conditions can change rapidly. Despite potential improvements in affordability, the overall picture remains challenging, and buyers should carefully evaluate their financial readiness before entering the housing market.