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Housing costs in the United States exceed the median household income, further straining affordability.
Potential home buyers must earn $113,520 per year to afford a typical home in the United States. That's 35% more than what a typical household earns annually, $84,072, according to new analysis from Redfin, a national real estate brokerage site.
“Since the pandemic, affordability has completely collapsed,” said Chen Zhao, a senior economist at Redfin.
February 2021 was the last month in which the typical household earned more money than they needed to afford the average home. Since then, there has been a deficit, said Zhao.
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“This deficit peaked in October 2023,” she added. “The reason it peaked then is because that was also when mortgage rates peaked.”
Meanwhile, home prices also remained high due to a shortage of inventory: the average sales price for a home was $412,778 in February 2024, according to Redfin.
The affordability deficit narrowed in February
According to Redfin, the average household was $29,448 short of affording a home in February. As of October 2023, households were $40,810 short. Back then, buyers needed an average income of $120,500 to afford a home.
Zhao said the affordability deficit narrowed as mortgage rates have continued to decline since the last peak in October. At this peak, the average 30-year fixed mortgage rate reached 8% for the first time since 2000.
“It’s been a pretty big change since last October,” Zhao said.
Other reasons such as seasonal pricing could play a role, as home prices tend to decline in the winter months, said Jeff Ostrowski, a real estate analyst at Bankrate.
But potential buyers are still on the sidelines, said Veronica Fuentes, a certified financial planner at Northwestern Mutual.
“Either they hold back or they take their time,” she said.
Recent layoffs in the tech industry have affected the hiring of some of its customers, Fuentes said. While their customers may not be on the hook, the layoff of their colleagues has made many of them more cautious.
“If you were laid off, could you still afford this mortgage? Do you have six months?” [of] Emergency savings or even a year [of] Emergency savings? … Can you still afford the mortgage for six months if you don’t have a job?,” Fuentes said.
Mastering high costs in the housing market
At a time when a potential buyer needs to earn about $114,000 a year to afford an average-priced home in the U.S., an entry-level home would make the most sense for budget-conscious buyers, according to experts.
A potential buyer should earn about $76,000 per year to afford an entry-level home, which Redfin defines as a home priced around the bottom third of the housing distribution.
Starter homes are hard to come by. Home builders have moved away from building entry-level homes in the last 15 years or so, Ostrowski said.
For most of the second half of the 20th century, someone could buy a home for $120,000 in many parts of the United States, he said.
“That just doesn’t exist anymore,” Ostrowski said.
Buyers may seek lower costs in certain U.S. markets. According to Redfin, there are 13 metropolitan areas where buyers could afford a typical home without making six figures.
In Detroit, the typical household had to earn $46,168 in February to afford the median-priced home, making it the most affordable market in the country. This was followed by Cleveland ($58,186), Pittsburgh ($61,603), St. Louis ($66,755) and Philadelphia ($73,182). The other metro areas where home buyers with incomes under $100,000 can afford a typical home are Indianapolis, Cincinnati, Milwaukee, Warren, Michigan; Kansas City, Missouri; Virginia Beach, Va.; San Antonio, Texas and Columbus, Ohio.
What's coming to the housing market?
Experts expect borrowing costs to fall as the Fed fleshes out its plans to cut interest rates. The rise in house prices is also expected to moderate as inventories increase.
Redfin said new listings rose 5% in the four weeks ended March 17, the largest year-over-year increase since May 2023.
“People are starting to get tired of waiting, so we're seeing inventories increase significantly,” Zhao said.
However, this should be viewed with caution, Ostrowski said, as the outlook was very different than things were six months ago.
“If you’re ready and you can afford it, buy it now,” he said. “Conditions are unlikely to improve significantly.”
In fact, while the combination of lower fares and greater supply may help affordability, “it won't completely change the picture,” Zhao said.