The Income Needed to Buy a Home Has Jumped 80% Since 2020

The income today’s homebuyers need to buy a typical U.S. home has grown 80% since 2020.

Or, put another way, today’s homebuyer needs to earn a minimum of roughly $106,500 a year to afford a home purchase—about $47,000 more than they needed four years ago.

A new Zillow report highlights the disparity between wage growth and the increase in the cost of buying a home from 2020 to the end of 2023.

And while home prices have grown faster than wages, today’s mortgage rates are also responsible for monthly housing costs that are nearly twice what homebuyers paid in 2020.

The most affordable markets for homebuyers are Pittsburgh, Memphis, and Cleveland. And, no surprise, California leads U.S. metros with the highest incomes required to afford a home.

WAGES HAVE NOT KEPT UP WITH THE INCREASE IN HOUSING COSTS

To comfortably afford a typical U.S. home, today’s home buyer needs to earn more than $106,000 a year—80% more than they needed in 2020. Meanwhile, the median U.S. household income has grown by only 23%.

This is why more buyers are more willing to share the cost of a home purchase with a friend or relative. Two people earning the typical household income of about $81,000 can easily afford the cost of a typical home in a relatively affordable market.

For folks bringing in less than $106K a year, it pays to be open-minded when it comes to covering the cost of a home purchase—both at the outset and month-to-month.

In 2020, an American household earning $59,000 a year could afford a typical home, spending 30% or less of their income on monthly mortgage payments with a 10% down payment.

The national median household income at the time was about $66,000, meaning over half of American households in 2020 had the financial means to buy a median-priced home.

Fast forward four years, and the household income required to afford a typical home—about $106,500—is well above the estimated $81,000 that today’s typical household earns.

Housing costs have soared over the past four years as drastic hikes in home prices, mortgage rates and rent growth far outpaced wage gains. Buyers are getting creative to make a purchase pencil out, and long-distance movers are targeting less expensive and less competitive metros. Mortgage rates easing down has helped some, but the key to improving affordability long term is to build more homes.

Orphe Divounguy

a senior economist at Zillow

The monthly mortgage payment on a typical home has almost doubled since January 2020—rising 96.4% to $2,188. And that’s assuming a 10% down payment, which is beyond the financial means of many aspiring homeowners.

Since January 2020, home values have climbed 42.4%, and the typical U.S. home is now worth about $343,000. Back in 2020, mortgage rates around 3.5% kept monthly housing costs affordable for homebuyers who could manage a down payment.

At the time of Zillow’s analysis, mortgage rates were at a weekly average of 6.6%, nearly doubling 2020 rates. Today’s weekly average is closer to 7%.

BUYERS ARE GETTING CREATIVE TO MAKE A HOME PURCHASE MORE AFFORDABLE

Today’s household making the median U.S. income would need an average of 8.5 years to save enough for a 10% down payment on a typical home—about a year longer than in 2020.

So, it’s no wonder more homebuyers are getting creative to afford a home purchase:

• Using loans or gifts from family/friends to cover their down payment
• House-hacking —i.e., renting out part of their home/property to help with monthly costs
• Co-buying a home with a friend or relative

With mortgage rates driving up the monthly mortgage payment, most younger buyers—millennials and Gen Z—are planning to rent out part (or all) of their home to earn rental income. Buyers in these demographics look for a home’s “house-hacking” potential as key criterion.

Roughly one out of five (21%) homebuyers are also sharing the cost of a home purchase by co-buying a property with a friend or relative.

METROS WHERE THE INCOME NEEDED TO AFFORD A HOME IS HIGHEST/LOWEST

In some metros, it’s easier for someone earning the median household income—or less—to afford the typical home in their market.

For example, these five metros require the lowest incomes to afford a typical home:

1. Pittsburgh, PA (Income needed to afford a typical home: $58,232)
2. Memphis, TN ($69,976)
3. Cleveland, OH ($70,810)
4. New Orleans, LA ($74,048)
5. Birmingham, AL ($74,338)

That said, the only major U.S. metros where a typical home is affordable to a household making the median income are these three:

1. Pittsburgh, PA
2. St. Louis, MO
3. Detroit, MI

And in these seven major metro areas, homebuyers need a household income of $200,000 or more to afford a typical home in their market:

1. San Jose, CA (Homebuyers need a minimum household income of $454,296)
2. San Francisco, CA ($339,864)
3. Los Angeles, CA ($279,250)
4. San Diego, CA ($273,613)
5. Seattle, WA ($213,984)
6. New York City, NY ($213,615)
7. Boston, MA ($205,253)

Key Details:

• A new Zillow report highlights the gap between today’s median income and the cost of buying a home. Compared to 2020, homebuyers now need to earn $47,000 more to purchase a median-priced home. 
• That’s 80% more than was needed in 2020. The median household income has grown only 23% during the same period. 

Posted by Sarah Lentz | Mar 4, 2024 | Housing Market

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