Housing affordability has completely collapsed, the economist says

Housing costs exceed median household incomes in the United States, adding pressure on affordability.

Prospective homebuyers need to earn $113,520 annually to buy a typical home in the U.S. That's 35% more than what the typical family earns annually, which is $84,072, according to a new analysis by Redfin, a national real estate brokerage site.

“Since the pandemic, affordability has completely collapsed,” said Chen Zhao, chief economist at Redfin.

February 2021 was the last month in which the typical household earned more money than it needed to cover the costs of the average home. There has been a deficit ever since, Zhao said.

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She added, “This deficit reached its peak in October 2023.” “The reason it peaked is because that's when mortgage interest rates peaked as well.”

Meanwhile, home prices have also remained high due to the inventory crunch: The median sales price of a home was $412,778 in February 2024, according to Redfin.

The average family couldn't save $29,448 to buy a home in February, according to Redfin. In October 2023, households were $40,810 short. At the time, buyers needed a median income of $120,500 to buy a home.

The affordability deficit has narrowed because mortgage rates have been steadily declining since the last peak in October, according to Zhao. At that peak, the average interest rate on a 30-year fixed mortgage reached 8% for the first time since 2000.

“It's been a very big change since last October,” Zhao said.

Other reasons such as seasonal pricing may be reflected, as home prices tend to fall in the winter months, said Jeff Ostrovsky, a housing analyst at Bankrate.

However, potential buyers are still on the sidelines, said Veronica Fuentes, a certified financial planner at Northwestern Mutual.

“They are either late or taking their time,” she said.

Fuentes said recent layoffs in the tech industry have affected the attitudes of some of her clients. While her clients may not be in danger, seeing their co-workers being laid off has made many of them more cautious.

“If you get laid off, can you still afford that mortgage? Do you have emergency savings for six months or even emergency savings for a year? … Can you still afford that mortgage for six months if you don't have any savings?” For emergency six-month job? Fuentes said.

While a potential buyer would need to earn about $114,000 a year to buy a median-priced home in the United States, a starter home would make more sense for price-sensitive buyers, experts say.

A potential buyer would have to earn about $76,000 a year to buy a starter home, which Redfin defines as a home that is in roughly the bottom third of the housing distribution in terms of price.

Entry-level homes are hard to come by. Over the past 15 years or so, homebuilders have moved away from building entry-level homes, Ostrowski said.

For almost the entire second half of the 20th century, a person could buy a home for $120,000 in many parts of the United States, he said.

“That doesn’t exist anymore,” Ostrowski said.

Buyers can look for lower costs in certain markets in the United States. Redfin found that there are 13 metro areas where buyers can purchase a typical home without earning six figures.

In Detroit, the typical family needed to earn $46,168 to buy a median-priced home in February, making it the least expensive market in the country. It was followed by Cleveland ($58,186), Pittsburgh ($61,603), St. Louis ($66,755) and Philadelphia ($73,182). Other metros where homebuyers earning less than $100,000 can purchase a typical home are Indianapolis, Cincinnati, Milwaukee, and Warren, Michigan. Kansas City, Missouri; Virginia Beach, Virginia; San Antonio, Texas, and Columbus, Ohio.

Experts say borrowing costs should fall as the Fed steps up its plans to cut interest rates. Home price growth is also expected to decline as inventory increases.

Redfin found that new listings rose 5% over the past four weeks ending March 17, the largest year-over-year jump since May 2023.

“People are kind of tired of waiting, so we're starting to see more inventory coming in,” Chow said.

However, this must be treated with some caution, Ostrovsky said, because the outlook six months ago was very different from how things stood.

“If you are willing and able to buy it now,” he said. “Conditions probably won't improve significantly.”

In fact, while the combination of lower interest rates and increased supply should help affordability, it “will not change the entire picture,” Zhao said.