See below exactly how much income you would need to earn in order to afford the principal, interest, taxes and insurance payments on a median-priced home in the 50 most populous metropolitan areas.
Key takeaways:
It would be nice to be reporting that home affordability conditions are improving, but that wasn't the case in the fourth quarter of 2023. While there is a good likelihood that mortgage rates will be lower in the first quarter for 2024 than they were to close 2023, that's not a guarantee at this point.
Regardless of what the future may hold, it's reasonable to question exactly how much help lower mortgage rates can provide, given that home prices remain both high and well supported. While the fourth quarter of 2023 did see a typical seasonal decline in home values, the quarter-to-quarter easing in prices was both more shallow and less geographically broad this year than last. This suggests that home prices will start 2024 in a firmer-than-usual position. With the increased homebuyer demand that lower mortgage rates will bring, home prices seem destined to press to potentially new record highs when the story of the spring home buying season is written later this year.
With their leveraging effect, lower mortgage rates are more important in the affordability calculation than are lower home prices. In the current "national" calculation, a $391,700 median home price with a 20% down payment ($313,630 loan amount) with a rate of 7.30% requires an annual income of $109,458.69 to qualify once typical tax and insurance costs are included.
That same $109,458.69 income can carry a $418,300 home with an interest rate of 6.65%, or about where the average 30-year mortgage rate is as we write this. So home prices could rise about 6.8% and the borrower who has a $109,458.69 qualifying income today is still in the game, so to speak, as they gain $26,600 in buying power with the decline in mortgage rates.
If home prices should remain at the present $391,700, a 6.65% rate would see a potential buyer need $103,602.59 to qualify. In such a case, a buyer with a lower income would gain access to the market at today's price level. However, should mortgage rates not retreat and remain at the present 7.30%, this same buyer with a $103,602.59 could only participate in the market if the median home price was $366,800, or about 6.4% lower than they were in the fourth quarter.
Outside of a major change in the economy, to current buyer demographics or a huge shift in the supply of available homes for sale, it's simply not likely that home prices would decline in the aggregate or by that much. At best, buyers can hope that price increases flatten out over time, that their incomes rise and mortgage rates decline at the same time, so that a more balanced market emerges. When those conditions might come together is anyone's guess at this point, but it doesn't seem highly likely we'll be seeing them this spring at the very least.
Home Price Trends
There's good news and bad news in the trend for home prices. The good news is that the 2020-2021 pandemic distortion to typical home price trends has now abated. Before the virus upended everything, it was most common to see home prices be at their highest annual point in the second quarter of each year, settling back a bit in the third, bottoming in the fourth then perking up again in the first quarter of the next year. This pattern again appears to be in place for a second post-COVID year. The bad news is that the typical seasonal softening for prices during the third and fourth quarters still wasn't nearly as wide or deep as it might normally be. Adding to the challenge for homebuyers is that home prices are still materially higher than the same levels from a year ago, even with the normal seasonal fade.
By way of comparison, in the third quarter of 2022 41 of 50 metros saw quarter-to-quarter price decreases; in the third quarter of 2023, that number was just 19 of 50. Comparing each year's fourth quarter, 2022 saw all 50 metros with lower home prices and a median decline across them of 5.05%. This year, only 46 of the 50 saw prices ease (92%), and the median fall in home prices for the period was just 3.47%. So there weren't as many declines, and the size of the declines was smaller, too.
Looking at a year-over-year comparison, there were eight metro areas where home prices were lower in 4Q23 compared to 4Q22, the same number as seen in a 4Q22-4Q21 comparison. Across the metros that did post an annual decline in price, the median decline was 2.41%; last year (4Q22) the same annual reference saw a 2.74% decline. For the 42 metros that did see price increases, they rose by a median 4.28% during the fourth quarter, very comparable to the 4.24% increase for the 4Q22 period.
More simply stated, potential buyers just haven't been seeing the same seasonal "bargains" in their local housing markets that they might have expected. As well, the shallower and less broad reductions set the stage for home prices to power higher this spring; unless there's a material change in the supply of new homes, it's a reasonable bet that new record-high home prices will be seen later this year.
Salary Situation
Seasonal price declines and only mildly higher mortgage rates during the fourth quarter actually saw an improvement in home affordability, as a lower income was needed to qualify to purchase a median-priced single-family homes... but only in 22 of the 50 largest major metro areas. This means that at least some of the relatively few homebuyers in the market during the period found lower costs than those who jumped in during the third quarter.
That said, a comparison against a more commonly-cited year-ago reference wasn't nearly as encouraging. By this measure, the income needed to purchase an existing home was higher in all but one metro area (Cleveland-Elyria OH), with increases otherwise ranging from as little as 0.53% in the New Orleans-Metairie LA metro to as much as a 23.61% increase in the San Jose-Sunnyvale-Santa Clara CA. This is the most expensive housing market in the nation (and one where homes are of course financed using pricier jumbo mortgage rates, which increases monthly costs).
On a "pass/fail" basis, and using the latest available median family income from the Census Bureau, only 16 of 50 metros (32%) have incomes that are high enough to be able to purchase a median-priced single-family home. The other 68% -- including San Jose -- have local incomes that simply aren't high enough to allow many potential homebuyers to participate in their market. Of course, given that there are still far too few homes available to meet even reduced demand, this might actually be serving to keep home prices from increasing even more strongly at the moment.
Inventory Issues
The number of homes for sale often thins out during the fourth quarter of each year. Short days, cold weather and holiday plans often sees even motivated sellers pull their listings or delay putting their homes on the market. In a year and a quarter where mortgage rates touched 22-year highs, well, there were likely even fewer compelling reasons to put a home up for sale.
Inventory levels of homes available to buy are measured against the present rate at which they are selling, called an inventory-to-sales ratio. While useful, this measure can be misleading, since a fall off in demand -- such as might happen when mortgage rates suddenly or continually rise -- can bloat the figure upward even if no additional homes for sale come to market. That's much the case in the fourth quarter of 2023; the average inventory level of existing homes for sale during the period was 3.4 months of supply... but sales for all of 2023 slumped to the slowest pace since 1995 (4.09 million annualized units), and actually ran at only a 3.80 annual million clip in the fourth quarter. According to the National Association of Realtors, there were 11.5% fewer homes on the market in December compared to November, but even this depleted level was actually somewhat better than December 2022.
It is said that the "lock-in effect" -- homeowners unwilling to sell and trade a low-rate mortgage for a higher one -- is a key factor in why there are so few existing homes for sale. While that is likely true, it's also true that home prices are also significantly higher now then they were over the last couple of years, and there's a reasonable likelihood that many wanna-be sellers might have difficulty qualifying for today's more expensive homes even if mortgage rates were measurably lower than they are at the moment.
At least one saving grace for some sellers is that they may be able to explore avenues that have fewer barriers and better actual availability of homes for sale. For example, a seller looking to buy new construction doesn't face the limited inventory issue that continues to bedevil potential buyers of existing homes, and for that, many builders are offering price concessions and even financing assistance. Folks relocating away from crowded coastal real estate market may also find better availability and value opportunities, too.
How much house will your income and debt-load support? You can run your own calculations with HSH.com's How Much House Can I Afford to Buy? calculator.
Downpayment Difficulties
Potential homebuyers chasing today's markets know the problem all too well. Rising home prices mean greater amounts of savings are needed to achieve even a small downpayment. Our calculations use a 20% down payment as a base, since this eliminates the complication of factoring for the costs of Private Mortgage Insurance, where premiums are dictated by the borrower's credit strength, size of the borrower's downpayment and choice of mortgage type and term.
Want to buy the fourth quarter's national median-pried home with a 20% down payment? You'll need to have amassed $78,340 in savings -- and that leaves out the need to accumulate funds for mortgage closing costs and any required reserves. Even for a highly diligent saver this amount will likely take years to amass, and by then, higher home prices will likely necessitate an even larger amount.
It's a small but welcome change that the dollar amount this quarter is actually lower than what was seen in the third quarter ($81,260) but unfortunately is still $2,660 more than in the fourth quarter a year ago. As such, a potential buyer would have had to save an additional $221.67 per month ($51.15 per week) on top of any other savings just to keep pace with home price increase over that time.
Not to be discouraging, but if someone could save $1,000 per month, it would take them about six and a half years just to reach today's 20% downpayment level; saving at twice that rate would make it about three and a half years... but in either case, the downpayment goal line will surely have moved, again as home prices tend to rise with inflation over time.
Even someone looking to get in with a minimal 3% downpayment -- available on Fannie Mae's HomeReady and Freddie Mac's Home Possible programs (and 3.5% down for FHA-backed loans) would need $11,751 and $13,710 respectively. This would shorten the savings timeframe, but a smaller downpayment on that same median-priced home means both a larger loan amount and incurring mortgage insurance costs -- so a higher income is actually required to qualify.
If you're thinking of going with one of these low-downpayment options, you'll want to see how these choices will work over time by using HSH's Low Downpayment Mortgage Comparison Calculator. You'll be able to see the costs of non-cancelable FHA mortgage insurance against the cancelable PMI costs of Fannie and Freddie offerings over any time horizon you desire. We take into account risk-based loan-level pricing adjustments, too.
Potential homebuyers of more modest means looking to buy homes often struggle to come up with even a minimum downpayment and closing costs, especially in heated markets. Help making the jump to homeownership is often available but is tricky to find if you don't know where to look. To help would-be homebuyers, HSH offers its database of Homebuyer Assistance Programs by state, where information about these valuable programs, vital website addresses, contact info and more can be found.