A potential home buyer must earn $107,281 to afford the $2,682 monthly mortgage payment on the typical U.S. home, up 45.6% compared with last year, according to a report from Redfin. The large increase in required income is a reflection of mortgage rates that have more than doubled in the past 12 months and increasing home prices.
According to Redfin data, the monthly payment for an American family buying a median-priced home has increased 70% from February 2020 to October 2022. Higher rates and related affordability concerns have priced out many potential buyers, relegating them to the sidelines of the housing market.
“If you had a $900,000 budget a few months ago, rising rates mean it’s now around $700,000—and sellers aren’t dropping their prices enough to make up for the change,” says Washington, D.C., Redfin agent Chelsea Traylor. “So buyers are searching farther away from the city in more affordable areas or waiting for prices and/or rates to come down before making a move.”
On Zonda’s most recent Housing Market Update webinar, chief economist Ali Wolf said mortgage rates alone are not contributing to affordability challenges, as home price appreciation also is playing a large role in the current market. According to Zonda estimates, Wolf says with rates averaging 7%, monthly payments are up 80% since the beginning of 2022; however, if rates declined to 6%, payments would still be up 60%, and if rates declined further to 5%, payments would still be up 45% since the beginning of the calendar year.
“Ultimately, when you look at the fundamental problem, it’s saying that affordability still is going to be an issue with 6% rates,” Wolf said during the webinar. “Affordability is still an issue, whether we’re talking about a 5% or 6% or 7% interest rate.”
On a regional basis, 16 of the 20 metros where the income necessary to afford a home has increased the most are in the Sun Belt region. The income needed to afford the typical monthly payment has increased by over 60% on a year-over-year basis for potential buyers in North Port, Florida; Miami; El Paso, Texas; Tampa, Florida; and Cape Coral, Florida. Many Sun Belt metros have long been popular with buyers due to their relative affordability and warm weather, with migration trends positively impacted by remote capabilities for many workers.
Relative affordability has worsened in each of the 93 metros analyzed by Redfin, with potential buyers needing to earn at least 30% more income to afford a home than they did a year ago in all analyzed markets. Lake County, Illinois, and California’s San Francisco, San Jose, and Oakland are the metros that experienced the smallest gains in income necessary to afford a median-priced home. While the increases in San Francisco, San Jose, and Oakland are small on a year-over-year basis, buyers in each metro need to earn the highest incomes nationally to afford homes in the market, with typical buyers needing to earn above $220,000 to purchase a median-priced home. According to Zonda analysis, Wolf said markets in the West, Mountain, and Southwest regions are where payment-to-income ratios have gotten most out of line.
Redfin says the year-over-year increases are smaller in the Bay Area and Chicago metros because they are parts of the country where home prices have begun to fall on a year-over-year basis.
Redfin analysis indicates potential home buyers in 45 metros need to earn an income greater than $100,000 to afford the typical home, a significant increase from only 16 metros a year ago. Detroit requires the lowest income, $48,435, to afford the area’s median-priced home, but the income required still represents a 42.3% increase on a year-over-year basis. Potential buyers in Dayton, Ohio; Cleveland; Rochester, New York; and Pittsburgh all need to earn fewer than $60,000 to afford a typical home, though the income required to afford a median-priced home has increased by at least 40% in each metro.
