Today's Homebuyers Must Earn An Estimated $50,000 Per Year More Than They Did Before The Pandemic To Afford The Same House

If you've been looking for a home and you feel like your money isn't going as far as it did before the pandemic, it's not your imagination playing tricks on you. According to a recent study by Zillow, today's homebuyer needs to earn an estimated $50,000 per year more than they did before the pandemic to afford a home without stretching their finances beyond reasonable limits.

This grim statistic is another harsh reminder of how difficult today's housing market is for most homebuyers. It's also why housing affordability has become a bona fide campaign issue up and down the ballot in elections all over the country.  Although it would be tempting to blame one single factor for the state of the housing market, the reality is that several factors are working against prospective homeowners.

It's More Complicated Than Rounding Up The Usual Suspects

In boxing, they say that the punches you don't see coming are the ones that do the most damage. The post-pandemic housing market is a perfect example of a case where prospective buyers were braced for one punch, only to be nearly completely floored by one they didn't see coming. Home prices were high before and during the pandemic, but interest rates in the two and three-percent range cushioned the price shock for buyers.

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What no one saw coming was the nearly 43% rise in home values nationwide since 2020 as reported by Zillow. A 43% spike in prices over three years is one thing, but when it comes on the heels of mortgage rates climbing into six- and seven-percent territory, you have two blows that few buyers saw coming. The impact of this unexpected one-two punch on the housing market has been profound.

A Lack Of Inventory And Slow Wage Growth Are Factors

First, there is the inventory problem. Price and interest rate spikes don't just affect buyers' behavior. People who financed houses before the pandemic with 30-year fixed-rate loans in the good old days of sub-three-percent interest rates are referred to as having golden handcuffs because what they can buy at post-pandemic prices and interest rates is not an upgrade on what they own.

This has led to a sort of doom loop where even baby boomers at the age where previous generations sold their single-family homes and downsized are choosing to stay put.  Any time there is a lack of inventory, the scarcity exerts intense upward pressure on the prices of homes that do hit the market. Unfortunately for prospective buyers, their post-pandemic wages haven't increased nearly enough to compensate for the increase in prices and mortgage rates.

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The Ugly Math For Post-Pandemic Homebuyers

According to the Zillow study, an American household with a $59,000 annual income and a 10% down payment could comfortably afford to pay the mortgage on the average American house in 2020. The standard for mortgage affordability was a monthly payment that didn't exceed 30% of the buyer's monthly earnings. At the time, the median household income in America was $66,000, which means millions of Americans could afford to buy an average home.

Although Zillow estimated the average American household's annual post-pandemic income has risen to $81,000, buyers with a 10% down payment would need to earn over $100,000 annually to comfortably afford the same home they could have bought before the pandemic on a $59,000 annual income.  Perhaps the scariest part about these numbers is that they reflect the income needed to buy the average home in America today.

Buyers in what have traditionally been America's most sought-after cities, such as New York or Los Angeles, need to earn considerably more than $100,000 to afford the average home in those markets. The same Zillow study showed that the median income necessary to comfortably afford a home in Los Angeles is $279,000. That might explain why Cleveland, where a $70,000 annual income still gets you an average house, is one of America's hottest housing markets. 

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