The American Dream of owning a home is becoming increasingly out of reach for many citizens, as the income needed to afford a median-priced home has skyrocketed in recent years. According to a report by Bankrate, Americans now need to make over $100,000 a year to purchase a median-priced home, marking a nearly 50 percent increase in just four years. In fact, a six-figure annual income is now required to afford a median-priced home in 22 states and the District of Columbia.
The affordability crisis can be attributed to several factors, including high mortgage rates, rising home prices, and a shortage of available homes. Mortgage rates have jumped more than three full percentage points in recent years, making it more difficult for potential buyers to secure affordable financing. In January 2020, the average 30-year fixed rate was 3.68 percent, compared to 7.07 percent as of March 2023. This increase in mortgage rates has put additional strain on buyers’ budgets.
Meanwhile, home prices have been steadily rising while wages have struggled to keep pace. Data from the Federal Reserve Bank of St. Louis shows that the median sales prices of new homes sold in the country jumped almost 27 percent between January 2020 and December 2023. In contrast, median weekly earnings only rose 20 percent during the same period, according to the U.S. Bureau of Labor Statistics.
The shortage of available homes has further exacerbated the affordability crisis. Many homeowners purchased their properties when mortgage rates were low, and selling their homes now would mean securing a new mortgage at a higher rate. This has created a “lock-in” effect, where homeowners are reluctant to list their homes for sale, leading to a supply shortage in the market. As a result, demand for homes has been growing while supply remains limited.
Region-wise, the West and Northeast require the highest incomes to afford a typical home. In states like California, Hawaii, Massachusetts, and Washington, individuals need to have an annual income in the range of $156,814 to $197,057 to purchase a median-priced home. On the other hand, the Midwest and South require the least income, with states like Mississippi, Ohio, Arkansas, Indiana, and Kentucky only requiring yearly incomes between $63,043 and $65,186.
The struggle to afford housing payments is taking a toll on American homeowners and renters. A recent survey by Redfin found that nearly half of respondents sometimes, regularly, or greatly struggle to afford their housing payments. Many are sacrificing other essential expenses, such as vacations and meals, to keep up with their monthly housing costs. Some have even delayed or skipped medical treatments, dipped into retirement savings, or borrowed money from family and friends.
In an effort to reduce their monthly payments, homebuyers are increasingly making larger down payments. The median downpayment for homebuyers has risen 24.1 percent from a year earlier, the largest annual percentage increase since April 2022. Redfin real estate agent Rachel Riva noted that buyers are doing whatever they can to pull together a large down payment to lower their monthly payments. However, this puts first-time homebuyers at a disadvantage, as they often lack the equity from a previous home sale and must compete against all-cash offers.
Overall, the dream of owning a home in America is becoming more elusive for many citizens. The combination of high mortgage rates, rising home prices, and a shortage of available homes has pushed homeownership further out of reach. As housing costs continue to rise, it is clear that something needs to be done to address the affordability crisis and ensure that all Americans have the opportunity to achieve the American Dream of owning a home.
