Buyers Must Earn $115,000 Annually To Qualify For A Typical Home In The U.S., Which Is $40,000 More Than The Average Income — Expert Recommends 'Think-Outside-The-Box' Approach For Prospective Homeowners

The dream of owning a home is becoming more challenging for many Americans, highlighted by the sharp rise in mortgage rates and the continual climb of home prices. 

A typical homebuyer now needs an income of $114,627 to afford a median-priced home in the U.S., a 15% ($15,285) increase from a year ago and a 50% jump since the start of the pandemic, according to Redfin data. This situation is particularly tough for first-time buyers who are facing the highest income requirement on record to secure a home.

The Redfin analysis, which compared the median monthly mortgage payments between August 2022 and August 2023, reveals that the national income data, adjusted for inflation, emphasizes the affordability crisis. The average rate on a 30-year fixed mortgage reached 7.07% in August and 7.57% by mid-October — the highest in over two decades. 

Despite a decrease in demand because of soaring mortgage rates, a lack of housing inventory is pushing home prices upward. The typical home in the U.S. sold for about $420,000 in August, nearing the all-time high of $432,000 achieved in 2022.

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As monthly mortgage payments hit an all-time high of $2,866, up 20% from $2,395 a year earlier, the financial gap between the typical American household's income and the income required to buy a home grows wider. Median household income was $74,580 in 2022, according to the U.S. Census Bureau, leaving a hefty $40,000 gap compared to the income needed to buy a median-priced home. Although hourly wages have seen a modest rise in 2023, the pace is slow compared to what is needed to afford a home. The average U.S. hourly wage increased by about 5% over the last year.

The housing affordability issue is less of a problem for all-cash buyers and those looking to move up, as they are relatively unaffected by the high mortgage rates. First-time buyers are hit the hardest. As Chen Zhao, Redfin's economics research lead notes, the ideal situation where rising mortgage rates would lower demand and home prices enough to offset high interest payments, remains out of reach. Inventory continues to stay near record lows, keeping home prices high.

"Buyers — particularly first-timers — who are committed to getting into a home now should think outside the box," Zhao said. "Consider a condo or townhouse, which are less expensive than a single-family home, and/or consider moving to a more affordable part of the country or a more affordable suburb." 

The affordability issue appears more pronounced in some regions. For example, homebuyers in Miami and Newark, New Jersey, face a 33% increase in the income required to afford a typical home, the highest among major U.S. metros. The situation is also tough in Eastern metros like Bridgeport, Connecticut; Dayton, Ohio; Rochester, New York; and Hartford, Connecticut, where the necessary income shot up by over 30%. On the flip side, pandemic homebuying hotspots like Austin, Texas, and Boise, Idaho, saw the smallest increases, despite a dip in home prices.

The analysis also highlights a glaring disparity across different metros. In half of the 100 metros analyzed, a six-figure income is now necessary to afford a median-priced home. This barrier is even more formidable in Bay Area markets like San Francisco and San Jose, California, where buyers need to earn over $400,000 annually. 

On the other end of the spectrum, Rust Belt cities require the least income. In Detroit, for example, homebuyers need about $52,000, though that's still up 19% from a year ago.

The growing housing affordability crisis emphasizes the need for practical solutions to bridge the gap between income levels and home prices. It also prompts a closer look at the underlying economic factors contributing to rising mortgage rates and home prices and creative approaches to improve housing accessibility for first-time buyers and other affected groups.

Amid the rising income requirements for buying a home, new companies are opening doors for people to invest in real estate in a more affordable way. Now, with as little as $100, anyone can invest in rental properties and earn passive income, without the hassle of managing the properties themselves. This innovation offers a practical option for those finding traditional homebuying out of reach, making real estate investment a more attainable goal despite housing affordability challenges.

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