The escalating home prices and mortgage rates have created an affordability crisis, leaving an average American household lacking over $20,000 annually to afford the median-priced home. This alarming statistic comes from the mortgage data company, HSH, which stated that a household would need an income of $105,324 to afford a typical home in the second quarter. This figure is a far cry from the Census Bureau’s 2021 report of the median household income of merely $70,784. The gap between income and homeownership is widening, as recent hikes in home-buying costs have significantly outpaced income growth.

The current housing market conditions are the most challenging in over a decade, with homes reaching their least affordability levels driven by the Federal Reserve’s anti-inflation rate hikes. The Federal Reserve Bank of Atlanta’s home affordability index plummeted in 2021, currently hovering near its record low set in October. Today’s home affordability is worse than in 2006, when a real estate bubble caused unsustainable price levels. Despite workers receiving significant pay raises in 2022 and 2023, the dream of homeownership remains elusive for many.

The Increasing Gap Between Home Prices and Household Incomes

Today’s escalating home prices coupled with soaring mortgage rates are making homeownership increasingly unattainable for the average household. According to mortgage data firm HSH, typical households now fall $20,000 short annually of the income required to purchase a median-priced home.

Rising Home Prices Outpace Income Growth

As per HSH’s estimates from Q2, a household would need an income of $105,324 to afford a typical home. However, data from the Census Bureau shows that the median household income in 2021 was only $70,784. The rapidly rising costs of homeownership have significantly outpaced income growth, as evident in the chart below. These figures align with other data suggesting that houses are now the least affordable they’ve been in over a decade, primarily due to the Federal Reserve’s anti-inflation rate hikes pushing up mortgage rates.

Affordability Index Plummets

The Federal Reserve Bank of Atlanta’s home affordability index took a nosedive in 2021 and is currently hovering close to its record low from last October. According to the Atlanta Fed, homes today are even less affordable than they were during the 2006 real estate bubble, when prices skyrocketed to unsustainable levels.

Income Increases Fail to Bridge the Gap

While the median household income figure from 2021 may be outdated given the substantial pay raises received by workers in 2022 and 2023, it’s clear that even if median household income increased at the same rate as median weekly earnings, homeownership would still remain a distant dream for many. As per the Bureau of Labor Statistics, if this were the case, the household income in 2023 would be $78,781, still significantly short of the amount needed for a median-priced home.

The Assumptions Behind the Estimates

HSH’s estimate is based on the assumption that housing payments, including insurance and taxes, should constitute 28% or less of the household income. It also assumes a home bought at the median price of $402,600 (according to the National Association of Realtors), a 20% down payment, and a 30-year fixed-rate mortgage at the average rate of 6.51% (as per Freddie Mac). However, with mortgage rates now surpassing 7%, affordability has worsened further.

Final Thoughts

This growing disparity between home prices and wages highlights the urgency for more affordable housing solutions. While income growth is a positive sign, it’s clear that without systemic changes to the housing market, the dream of homeownership will remain out of reach for many hardworking Americans. Policymakers and industry stakeholders must prioritize making homeownership more accessible and affordable.