Housing ‘affordability has just totally collapsed,’ economist says

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Housing costs exceed median household incomes in the United States, further straining affordability.

Potential buyers need to earn $113,520 per year to afford a typical home in the United States. That’s 35% more than a typical household earns annually ($84,072), according to a new analysis from Redfin, a national real estate brokerage site.

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

February 2021 was the last month the typical household earned more money than they needed to afford a median home. They have been in deficit ever since, Zhao said.

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“This deficit peaked in October 2023,” she added. “The reason they peaked at that time is because that’s when mortgage rates also peaked.”

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

The accessibility deficit narrowed in February

According to Redfin, the average household was $29,448 short of affording a home in February. In October 2023, households were short $40,810. At that time, buyers needed an average income of $120,500 to afford a home.

The affordability gap has narrowed because rates have seen a steady decline since the last peak in October, according to Zhao. 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, may be a factor, as housing prices tend to fall during the winter months, said Jeff Ostrowski, a housing analyst at Bankrate.

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

“Either they are hesitant or they are taking their time,” she said.

Recent layoffs in the tech sector have affected the attitudes of some of his clients, Fuentes said. While his clients may not be in the hot seat, seeing their colleagues laid off has made many of them more cautious.

“If you were laid off, could you still pay that mortgage? Do you have six months (of) emergency savings or even a year of emergency savings? …Can you still pay the mortgage for six months if you don’t have a job?” Fuentes said.

Coping with the high costs of the real estate market

At a time when a potential buyer needs to earn about $114,000 a year to afford a median-priced home in the United States, a starter home would make the most sense for price-sensitive buyers, experts say.

A potential buyer would need to earn about $76,000 a year to afford a starter home, or a home in the least expensive and smallest third of homes, according to Redfin.

Although ideal, starter homes are difficult to find. At this point, homebuilders over the past 15 years have moved away from building entry-level homes, Ostrowski said.

During most of the second half of the 20th century, someone could buy a house for $120,000 in many parts of the United States, he said.

“It just doesn’t exist anymore,” Ostrowski said.

Buyers may seek lower costs in certain markets in the United States. There are 13 metro areas where buyers could afford a typical home without making six figures, Redfin found.

In Detroit, the typical household needed to earn $46,168 to afford a median-priced home in February, making it the most affordable market in the country. This is followed by Cleveland ($58,186), Pittsburgh ($61,603), St. Louis ($66,755) and Philadelphia ($73,182). Other metros where buyers earning less than $100,000 can afford a typical home are Indianapolis, Warren, Michigan, Cincinnati, Milwaukee, Kansas City, Virginia Beach, Virginia, San Antonio and Columbus, Ohio.

What does the real estate market hold?

Experts say borrowing costs are likely to fall as the Fed solidifies its plans to cut interest rates. House price growth is also expected to slow as inventories are expected to build.

New listings climbed 5% over the past four weeks ended March 17, the largest year-over-year increase since May 2023, Redfin found.

“People are getting a little tired of waiting, so we’re starting to see a lot more inventory coming in,” Zhao said.

However, this should be taken with a grain of salt, because the outlook six months ago was very different from how things played out, Ostrowski said.

“If you’re ready and can afford it, buy now,” he said. “Conditions are unlikely to improve significantly.”

Indeed, while the combination of lower fares and increased supply should help with affordability, “it won’t completely change the situation,” Zhao said.


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