U.S. homebuyers need to earn an annual income of $115,454 to afford the median priced home ($433,101), according to a new report from Redfin.
That’s down 1.4 percent year-over-year — the first annual decline since June 2020, when mortgage rates set a new record low.
The income needed to afford a home fell because mortgage rates posted their first annual decline in three years. The average interest rate on a 30-year mortgage dropped to 6.5 percent in August from 7.07 percent a year earlier, and has since fallen further, now sitting at 6.09 percent.
This is based on a Redfin analysis of the estimated median U.S. household income and median monthly housing payments as of August 2024. References to the “median-priced” home in August refer to the median sale price of homes that were purchased during the month. Redfin considers a home affordable if a buyer taking out a mortgage spends no more than 30 percent of their income on their monthly housing payment.
“Housing affordability is improving for the first time in four years, so if you want to buy a home and can afford to, now could be a good time because it’s unlikely to become markedly cheaper in the near future,” Redfin Senior Economist Elijah de la Campa said in a release. “Many house hunters are waiting to see if mortgage rates fall a lot further, but that probably won’t happen anytime soon. That’s because the Fed’s latest interest rate cut and its plans for future cuts were highly anticipated, meaning they’re already mostly priced into mortgage rates. When the Fed cuts short-term interest rates, long-term rates like mortgage rates don’t always move down nearly as much."
Home prices also tend to go up over time, so waiting to buy likely means a higher price tag and down payment. It also may mean more competition because eventually, other buyers will realize rates probably won’t come down substantially more and will jump into the market.
While housing affordability improved in August, the average American household still can’t afford to buy a home. The typical household earns an estimated $83,853 per year, which is 27.4 percent less than the $115,454 they need to afford the typical house. A household on the median income would need to spend 41.3 percent of their earnings on housing to buy the median priced home. Any household that spends over 30 percent is considered “cost burdened.” Less than one-third of home listings are affordable for the typical U.S. household, down from more than half before the pandemic, Redfin added.
That’s likely one reason many house hunters remain on the sidelines despite the drop in mortgage rates. Home prices are up 3 percent year-over-year and are just 2.1 percent below their all-time high, primarily because a shortage of homes for sale is keeping prices elevated. This is giving some buyers sticker shock. Other buyers are holding off because they’re confused about the new National Association of Realtors rules or are waiting to see how the presidential election shakes out.
February 2021 was the last month on record when the typical household earned enough to afford the median priced home. Back then, the median household income was $69,021, or 5.7 percent more than the $65,308 needed to afford the typical home, according to Redfin.