By Aarthi Swaminathan
For someone earning the median income, home ownership is increasingly out of reach
April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their financial health and offer advice on how to save, invest and spend their money wisely. .
Are you looking for a forever home?
Let’s choose a round number. How much money do you need to make to afford a million dollar house? And what about a $500,000 house?
Both of these figures are obviously higher than the $363,000 median price for a home in the United States, but a MarketWatch analysis based on data from Realtor.com helps demystify these audaciously high house prices.
Mortgage rates fall to their lowest level in two months, but that does little for homebuyers, who may be frustrated by the lack of homes for sale on the market – not to mention the fact that housing prices houses are back on the rise.
A new report from Zillow (Z) revealed Thursday that the value of a typical home in March rose 0.9% from the previous month. It is the highest figure since June 2022, before the Federal Reserve raised interest rates and pushed up mortgage rates.
“This month’s turnaround confirms that market conditions have shifted from a late 2022 slow seller’s market to a typical springtime seller’s market, with remarkable speed,” wrote Jeff Tucker, senior economist at Zillow, in The report.
For buyers on the hunt, budget calculators on various websites and consultations with lenders will help them figure out what they can afford with their income or with their assets.
But for casual sailors hoping to prepare for spring home-buying season, how much do they need to make to afford their dream home?
MarketWatch worked with data from Realtor.com (NWSA) for this story.
First, the playing field: we’re talking about a situation where a buyer is considering making a 10% down payment (the median), taking out a 30-year fixed rate mortgage at 6.32%, to pay a tax of 1.72% and the insurance rate (including the effective tax rate and home insurance as a percentage of the price of the home), and ensuring that the maximum share of income allocated to the payment is reduced to 30%.
What income to afford a $500,000 house?
To afford a $500,000 home, a person would typically need to earn about $140,000 a year, said Hannah Jones, economic data analyst at Realtor.com.
Principal and interest payments would total $2,791 per month, and with taxes and insurance, that figure would rise to $3,508. By ensuring that only 30% of income is allocated to this amount, a person should earn $140,312, Jones calculated.
What income to afford a house of 1 million dollars?
For a million-dollar house in a big city like New York or San Francisco, a person would need to earn at least $281,000 a year, Jones said.
Principal and interest payments would total $5,582 per month, and with taxes and insurance, that figure would rise to $7,015. By ensuring that only 30% of income is allocated to this amount, a person should earn $280,625, Jones said.
Keep in mind that million-dollar homes are becoming less common, Redfin said in a March note, as homes lose value amid a cooling housing market.
What income to afford a house at the median price?
For an existing home — which has a median price of $363,000, according to the National Association of Realtors — a person would need to earn an income of $101,000, Jones calculated.
Principal and interest payments would total $2,026 per month, and with taxes and insurance, that figure would rise to $2,547. By ensuring that only 30% of income is allocated to this amount, a person should earn $101,867.
Many buyers may be considering a new home, given that there is currently a limited supply of existing homes.
Rick Palacios Jr., director of research and managing director of John Burns Research and Consulting, explained last month how the construction industry’s share of all sales has risen dramatically since the Great Recession.
For a new home — which costs $438,200, according to the Census Bureau — a person would need to earn an income of nearly $123,000, Jones said.
Principal and interest payments would total $2,446 per month, and with taxes and insurance, that number would rise to $3,074. By ensuring that only 30% of income is allocated to this amount, a person should earn $122,970, Jones said.
The average home buyer must earn more than the median income to afford a home. Despite a slowdown in the housing market, homes remain expensive for many people.
“For each of these price points, the minimum income required to stay in line with affordability guidelines is well above the national median,” Jones noted.
The real median household income in the United States was $70,784 in 2021, according to the latest figures from the Census Bureau.
“Potential home buyers continue to be constrained by both high home prices and high mortgage rates. Although home price growth has slowed, the national median listing price in March 2023 was close to 33% higher than three years earlier,” Jones noted.
“The conditions of accessibility will have to improve considerably”
House prices have outpaced inflation, a separate report from Clever, a property data company, showed.
“The most worrying statistic is that house prices have continued to significantly outpace inflation,” the report said. “Comparing January 1970 to June 2022, the latest month for which we have complete data, median home sales prices increased by 1,858% while inflation, determined by the price of all goods, increased by … 677%.”
Comparing scenarios for baby boomers and millennials aged 33 looking for their first home, Clever found that in 1988, the average baby boomer was considering a home with a median price of $110,000, with an annual income median price of $27,230 — a home price-to-income ratio of 4. In 2022, the average millennial looking at a median-priced home would find the gulf has widened further: a new home with a price of $430,000 $ for an annual salary of $70,000 a housing price to income ratio greater than 6.
According to a recent NAR report, baby boomers now make up 39% of homebuyers, displacing millennials from the top spot. The majority are repeat buyers who have equity in their home that allows them to buy their ideal home, noted NAR’s Jessica Lautz at the time.
Meanwhile, the number of homes on the market available for sale is shrinking: The number of new listings fell 22.3% in March, compared to a year earlier, Zillow said.
“The most likely reason for the scarcity of listings is that homeowners don’t want to give up their very low mortgage rates – often around 3% – in an environment where they would have to start paying 6% or more on a new home loan. 30 years,” added Tucker of Zillow.
Overall, “the market has exceeded the limit of absolute affordability for many buyers, which has resulted in lower buyer demand and lower market participation,” Jones said. “Affordability conditions will need to improve significantly, likely thanks to lower house prices and lower mortgage rates, to see buyers returning to the market in droves.”
Realtor.com is operated by News Corp subsidiary Move Inc. and MarketWatch is a unit of Dow Jones, also a News Corp subsidiary.
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