Housing Affordability Gets Crushed as Qualifying Income to Buy Home Doubles to Over $100,000

A house is for sale in Arlington, Va., July 13, 2023. Saul Loeb/AFP via Getty Images

A new housing industry report shows that home affordability is plumbing staggering new lows, with the qualifying annual income for a median-priced home more than doubling from where it was in 2020 to a whopping $107,000.

The stark figure was revealed in the Monthly Housing Affordability Index, released on Oct. 25 by the National Association of Realtors (NAR).

The report shows that, in 2020, the qualifying annual income (based on a 20 percent down payment and a 25 percent qualifying ratio for monthly housing expense to gross monthly income) to buy a median family home was $49,680.

That’s less than half of what it was in August 2023, the latest month of available data, according to NAR.

A separate Oct. 17 report from real estate data provider Redfin painted much the same (though slightly gloomier) picture, estimating that a homebuyer today must earn $114,627 to afford the median-priced U.S. home.

That’s the highest annual income needed to afford a home on record.

“U.S. housing affordability is worse today than the peak of the last housing bubble. The median American household would need to spend 44.6 percent of their income to afford the median priced home, a record high,” market analyst Charlie Bilello said in a post on X.

Some relief could be on the horizon for prospective homebuyers, however, as an Oct. 26 report from the Mortgage Bankers Association (MBA) indicates that, in September, homebuyer affordability flashed signs of improvement.

The national median payment applied for by purchase applicants inched down from $2,170 in August to $2,155 in September, per MBA.

“Although there was a modest improvement in affordability last month, higher rates and low housing inventory are both keeping many would-be buyers out of the housing market,” Edward Seiler, MBA’s associate vice president, Housing Economics, said in a statement.

“Challenges remain as 2023 comes to an end, but MBA is forecasting for a slight rebound in originations and a moderation in mortgage rates in 2024,” he added, referring to home loan applications, which a separate report from MBA fell again this week to a fresh 28-year low.

One-Two Punch of High Mortgage Rates and Few Listings

Sky-high mortgage rates and rising home prices due to short supply have delivered a one-two punch to prospective homebuyers.

“In a homebuyer’s ideal world, rising mortgage rates would push demand and home prices down enough to make up for high interest payments. But that’s not what’s happening now: Although new listings are ticking up slightly, inventory is still near record lows as homeowners hang onto their low mortgage rates—and that’s propping up prices,” Redfin Economics Research Lead Chen Zhao said in a statement.

Redfin estimates that, in August, the typical U.S. home sold for around $420,000, while NAR data puts that figure at $413,500—roughly the same ballpark.

There is some good news for homebuyers, however, as an Oct. 26 report from Redfin shows that new listings of homes for sale rose 0.3 percent year-over-year in the first few weeks of October. While that’s a small increase, it’s the first since July 2022 and is sure to be welcome by prospective buyers.

“Some people are selling right now because they’re concerned home values will go down, though that’s definitely not a foregone conclusion,” Ali Mafi, a Redfin Premier agent in San Francisco, said in a statement.

Back in 2020, the benchmark interest rate set by the Federal Reserve was near zero.

But soaring inflation would prompt the Fed to embark on its fastest pace of raising rates in decades, with the Fed funds rate now sitting at between 5.25 and 5.5 percent.

The Fed funds rate has an indirect impact on mortgage rates, which have soared from around 3 percent in 2021 to around 8 percent now.

Mortgage Rates Soar

The average rate for a benchmark 30-year mortgage recently climbed to 8 percent, according to Mortgage News Daily, which uses data from multiple lenders from across the country to determine the current average loan rate on a daily basis. This rate is the highest in 23 years.

With rates at multi-decade highs, mortgage application demand has stalled.

The Mortgage Bankers Association (MBA) said on Oct. 26 that mortgage application demand has plunged for the seventh consecutive week, to the lowest level since 1995.

“Ten-year Treasury yields climbed higher last week, as global investors remained concerned about the prospect for higher-for-longer rates and burgeoning fiscal deficits,” Joel Kan, MBA’s deputy chief economist, said in a statement

“Mortgage activity continued to stall, with applications dipping to the slowest weekly pace since 1995. These higher mortgage rates are keeping prospective homebuyers out of the market and continue to suppress refinance activity,” he added.

Mortgage rates were around 3 percent just two years ago. Initially, they rose on the back of the Fed’s rate hikes, but more recently they’ve been pushed higher by bond market activity.

The yield on the benchmark 10-year Treasury note, which is heavily influential in setting mortgage rates, has been hovering at around 4.9 percent, though it recently broke above 5 percent—the highest level since 2007.

Experts say borrowing costs look unlikely to retreat in the near term, unless a sudden directional shift takes place in bond markets.