One of the few good things that happened during the pandemic was mortgage rates below 3%, which has allowed younger and lower-income buyers to enter the real estate market. But that changed abruptly in 2022 and 2023 when mortgage rates and housing prices soared…with a peak at 8% in October 2023.
These factors led to an extremely tight market in which many homeowners held on to their current properties out of fear of higher mortgage rates and fewer new buyers who can afford to purchase a home. Indeed, housing affordability has gotten so bad that potential buyers need to earn about $50,000 more now than before the pandemic to be able to “comfortably” afford a home, according to one study. Zillow Report released Thursday. And buying a home goes beyond monthly mortgage payments, experts agree.
“Comfortably affording a home in today’s market means having the financial ability to cover mortgage payments, property taxes, insurance and other associated costs without significant financial strain,” Stacy Brown, director of technical training at Real estate managementtell Fortune. Given “the fact that the baby boomer generation is staying at home rather than moving to retirement communities, as well as those who moved to the suburbs during the pandemic (choosing to work) remotely, access to comfortable home ownership is out of reach for many.”
Now, buyers need to earn an average of $106,000 to afford a home, 80% more than in January 2020. Zillow said. Monthly mortgage payments on a “typical home,” which Zillow defines as costing $343,000, nearly doubled during that time to $2,188, assuming a 10% down payment. And while mortgage rates and housing prices are the main culprits for today’s housing affordability problems, there are other factors that make buying a home more expensive.
Mortgage rates and house prices don’t tell the whole story
Since January 2020, home values have jumped nearly 43%, according to Zillow. In 2023 alone, house prices will increase by almost 6%, according to the Case-Shiller National Housing Price Index (a standard measure of the real estate industry). Meanwhile, mortgage rates ended January 2020 at around 3.5%, half the current 30-year fixed mortgage rate of 7.1%, according to Daily Mortgage News.
While just looking at mortgage rates and home prices is dire enough, wages have also not kept up with the demands of buying a home. A household earning a salary of $59,000 in 2020 could comfortably afford the monthly mortgage, meaning they would spend no more than 30% of their income with a 10% down payment, according to Zillow. This was lower than the U.S. median income at the time, which was about $66,000, “meaning that more than half of American households had the financial means to afford homeownership.” Zillow economic analyst Anushna Prakash wrote in the report.
“A significant portion of Americans struggle to afford homeownership, especially among younger age groups and those with lower incomes,” said Jaclyn Anastasakos, a real estate agent at Luxury properties in Miami, says Fortune. “The gap between income levels and housing costs has widened, making it harder for many to realize their dream of homeownership. »
Today, the median income in the United States is $81,000, according to Zillow, but prospective homeowners need more than $106,000 to “comfortably” purchase a home. This means that wages have not kept pace with housing prices, mortgage rates and other costs associated with purchasing a home in the United States. Filippo Incorvaia, owner and broker at FI Real Estatesays housing affordability “seems the most intense” since he began his career 20 years ago.
“Today, six-figure incomes are essential to afford housing,” says Incorvaia. Fortune. “This usually means both partners are working and contributing, and you could still be struggling financially. Meanwhile, buying property on your own is more difficult than ever.
And some housing markets — particularly large metropolitan areas — that are experiencing high demand and limited supply “may require even higher income to afford housing,” Brown says.
“Even in generally affordable areas, neighborhoods considered affluent or renovated continue to have higher real estate prices,” says Brown. “Combined with this, major employers are moving their operations to states with more favorable taxes or other incentives, (and) many areas that were considered affordable are quickly becoming out of reach for many.”
House hacking
Incorvaia finds that many people in their 20s are “completely delaying the dream of homeownership” because housing affordability has become very tight. The majority of its first-time home buyers are professionals in their 30s and 40s who are focusing on their careers while renting and saving for a down payment.
As fewer people, and even couples, are able to purchase a home, many Gen Z and millennials have turned to “house hacking,” or co-purchasing with friends or family. They then rent all or part of these properties in order to generate additional income. Zillow reports that 21% of last year’s buyers I did this. While it may seem like a good idea in the meantime, given that mortgage payments remain high, house hacking has its downsides.
“House hacking is a real phenomenon,” says Incorvaia. “Friends and many couples choose to buy property together to reduce costs, but this also reduces equity and may not be the most viable solution in the long term. »
