The annual income U.S. homebuyers need to afford the median home declined this August for the first time in four years as falling mortgage rates brought a years' long rise in monthly payments to heel.
Households need to earn at least $115,454 per year to afford a median priced home in America ($433,101), according to a new report from Redfin. That’s down 1.4% year over year – the first annual decline since June 2020, when mortgage rates were at record lows.
This improvement in affordability is the direct result of mortgage rates posting their first annual decline in three years this August. The average interest rate on a 30-year mortgage dropped to 6.5% in August from 7.07% a year earlier, and as of Sept. 24, is now sitting at 6.09%.
“Housing affordability is improving for the first time in four years, so if you want to buy a home and can afford to, now could be a good time because it’s unlikely to become markedly cheaper in the near future,” said Redfin Senior Economist Elijah de la Campa. Buyers need to spend 30% or less of their income on their monthly housing payment for a home to be considered “affordable” by Redfin.
Despite the recent improvement in home affordability, the average American household still can’t afford to buy a home. The typical household earns $83,853 per year, which is 27.4% less than the $115,454 they need to afford the median-priced home. This also renders them “cost-burdened” by being above the 30% threshold, spending 41.3% of their earnings on housing costs.
“Many house hunters are waiting to see if mortgage rates fall a lot further, but that probably won’t happen anytime soon," de la Campa added. "That’s because the Fed’s latest interest rate cut and its plans for future cuts were highly anticipated, meaning they’re already mostly priced into mortgage rates. When the Fed cuts short-term interest rates, long-term rates like mortgage rates don't always move down nearly as much."
The median U.S. housing payment was $2,534 during the four weeks ending Sept. 15, down 2.7% from a year earlier – the biggest decline since May 2020.
Less than one-third of home listings are affordable for the typical U.S. household, down from more than half before the pandemic. Home prices are up 3% year over year and are just 2.1% below their all-time high, primarily because a shortage of homes for sale is keeping prices elevated.
“This is giving some buyers sticker shock,” Redfin analysts said in their report. “Other buyers are holding off because they’re confused about the new NAR rules or are waiting to see how the presidential election shakes out. February 2021 was the last month on record when the typical household earned enough to afford the median priced home.”
National Association of Realtors (NAR) data was congruent with Redfin’s August data, showing existing-home sales retreat 2.5% in August and 4.2% year over year.
Metropolitan areas in the Southern and Western U.S. boasted the largest improvements in affordability. Topping this chart is Austin, where homebuyers need to earn an annual income of $133,346 to afford the median priced home, down 7.9% year over year. This is the largest decline among the 50 most populous U.S. metropolitan areas. Next came San Antonio (-7.1%), followed by San Francisco (-6.2%), Oakland (-5.5%), and Fort Worth (-5.2%).
Meanwhile, the steepest incline in income needed to afford the median area home took place in Philadelphia, where homebuyers needed $82,447 – up 5.8% year over year. Next came Chicago (5.4%), Nassau County, NY (4.6%), Providence (2.6%), and New Brunswick, NJ (2.5%).
