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When it comes to buying a home, affordability continues to slowly improve.
U.S. households with median incomes estimated at $86,300 and enough money for a 20% down payment can now afford a home for $331,483, up $30,302 from $301,181 a year ago, according to a new report from Zillow. By “afford,” Zillow means that the monthly mortgage payment, including insurance and property taxes, would be less than 30% of a household’s income.
“A $30,000 increase in purchasing power can result in a different neighborhood, a larger home, or a home with fewer compromises,” the report says.
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The improvement is at least partly due to the slowly falling interest rates. According to Mortgage News Daily, the average interest rate for a 30-year fixed-rate mortgage was 5.99% as of February 27, but has since increased to 6.14%. A year ago it was 6.79%.
For mortgages, even 0.5 percentage point lower interest rates can make a difference, said Kara Ng, senior economist at Zillow and author of the report.
“According to a rough estimate, a half percentage point drop in mortgage rates could mean savings of about $1,000 per year for a typical U.S. home,” Ng said.
According to the National Association of Realtors, a one percentage point drop in interest rates could increase the number of households who can afford to buy a home by about 5.5 million households, including about 1.6 million renters who could buy a home for the first time. NAR said it estimated the income needed to afford an average-priced home assuming a 30-year mortgage, a 10% down payment and a mortgage payment of 25% of income, and then calculated it using a 7% mortgage interest rate and a 6% interest rate.
A mid-priced home is still unaffordable
However, affordability remains strained. While the amount a middle-income household can afford is higher than it was a year ago, that figure is still below the median price of a single-family home, which was $400,300 in January, according to NAR.
Based on that price and a mortgage rate of 6.19%, the January average, buyers would need an income of $94,032 to qualify for a mortgage, according to NAR’s affordability index. This measurement also assumes the buyer makes a 20% down payment, which in this case would be $80,060. And of course, lenders consider more than just income when deciding whether to approve a loan, including factors like credit score, credit history and outstanding debts.
That income amount is down from last year: When the average interest rate was 7.04% and the median home price was $398,100, buyers needed $102,096 in income to qualify, NAR’s affordability index shows.
Meanwhile, property values have risen much faster than household incomes. According to a recent study by the Federal Reserve Bank of St. Louis, from 2000 to 2024, median per capita income increased by about 155%, while median home prices increased by about 207%. Additionally, mortgage rates rose from under 3% in mid-2021 to nearly 8% in October 2023.
“Buyers are still feeling the impact of rapid price increases during the pandemic and mortgage rates that are still much higher than at the start of this decade,” Ng said.
More buyers in the market could drive up prices
Another contributor to affordability is improved inventory: According to the Zillow report, there were 6% more homes on the market in January than a year earlier. However, the general housing shortage remains a problem.
Improved affordability also means there are more potential buyers this spring.
“If housing supply does not increase, these additional potential buyers entering the market could simply drive home prices higher,” NAR chief economist Lawrence Yun said in a January news release about upcoming home sales and rising affordability.
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