The monthly mortgage payment has nearly doubled since January 2020.
If you’re in the market to purchase a home, you’re probably aware of the various dos and don’ts — for example, don’t make any other major purchases, don’t waive a home inspection, and do factor in home maintenance costs.
But here’s something you may not have been expecting: According to Zillow, you’ll need to make more than $106,000 annually to comfortably afford a home. Anushna Prakash, Zillow’s economic research data scientist who conducted this study, says the number is up from $59,000 in 2020, marking an 80% increase.
Prakash explains that in 2020, a household with an annual income of $59,000 could pay a mortgage without spending more than 30% of its income (assuming a 10% down payment). “That year, U.S. median income was about $66,000, so more than half of American households could afford homeownership,” she says.
But now, Prakash says the average U.S. household earns around $81,000, far short of the $106,000 needed to comfortably maintain payments. “The monthly mortgage payment on a typical U.S. home has nearly doubled since January 2020, up 96.4% to $2,188 (assuming a 10% down payment),” Prakash says.
According to Zillow, the household income needed to afford a home is lowest in these five cities:
- $58,000 — Pittsburgh
- $70,000 — Memphis
- $71,000 — Cleveland
- $74,000 — New Orleans
- $74,000 — Birmingham
And it’s highest in these five cities:
- $454,000 — San Jose/Silicon Valley
- $340,000 — San Francisco
- $279,000 — Los Angeles
- $274,000 — San Diego
- $214,000 — Seattle
“Housing costs have skyrocketed over the course of the pandemic, and incomes have failed to keep up,” Prakash says. And first-time home buyers are most impacted, since they don’t have the benefit of built-up home equity.
“But rising mortgage interest rates and home prices are also affecting would-be sellers, who are less likely to want to sell and become a buyer in today’s market,” Prakash notes. And this holding pattern constrains supply and also keeps prices high. “It’s one of the biggest reasons why it’s so hard to find a home today, let alone find one that’s affordable,” she explains.
Options For Buyers
However, this doesn’t necessarily mean that buyers below the $106,000 income level are locked out of the housing market.
Terry DeMonaco, agent at Coldwell Banker Realty in Naples, Florida, presents one solution that will require patience. “Wait and save more money for a larger down payment, which can help reduce the loan amount and monthly mortgage payments,” she say. Or, DeMonaco suggests that you can wait until mortgage rates drop, which will lower your monthly payments.
However, if patience isn’t your strong suit, she has another option. “Explore areas that are more affordable, where housing prices may be lower,” DeMonaco says. While settling for a home that may not work is a first-time home buyer mistake, it’s just as important that you don’t purchase a home that you can’t afford. Location is, indeed, important, but keep in mind that homes in prime areas tend to have matching price tags. A home in a transitional (yet safe) neighborhood with a good school district (if you have kids) in close proximity to your preferred area can be a much more affordable option.
We’re seeing a trend in co-owning a house with friends or families, which is one way to make homeownership more attainable.
And the market has softened enough that seller incentives are worth exploring. “In our market, inventory has risen 59% since last January, and with more options for buyers, sellers may be more willing to offer incentives to attract buyers,” DeMonaco explains. “These incentives could include covering all or a portion of the buyer's closing costs, participating in a mortgage buy-down program, providing seller financing for the loan, or even offering the option to assume an existing mortgage.” And she says you can always refinance when rates drop, which will reduce your monthly payment.
Avoid Being House Poor
Being house poor means you’re spending an disproportionate amount of your income on housing expenses. “As much as owning a home is the quintessential American Dream, it can quickly turn into a nightmare if you're over your head and strapped for cash,” warns Bill Golden, a realtor-associate broker at Keller Williams Realty Intown Atlanta. “It's not something you can easily change, like selling that too-expensive car you bought, or quitting that overpriced health club you joined,” he explains.
Mortgage lenders do have safeguards in place — as it relates to qualifying buyers, and Golden says this is to make sure that you can afford to pay the mortgage loan. But you can’t always use their numbers as a guide. “Most clients tell me that there is a number they can qualify for, which is not necessarily the same number they're comfortable with,” he explains.
This view is shared by Felton Ellington, community lending manager at Chase Home Lending, who says that lenders will review your debt-to-income ratio but explains that no one knows your personal financial situation as well as you do. “A qualified lending professional can help to set a budget of how much home you could afford, on paper, but it is very important for homebuyers to think through what type of payment would be feasible and sustainable for them,” he adds. So, even if, technically, you may be able to afford a more expensive house, he says the monthly payment may be higher than you’d like.
“In that case, you’d want to set a lower budget for your house than what you may qualify for,” Ellington says. “While it can be tempting to spend more than your budget for a home that meets everything on your wish list, it’s important to ensure you’ll be able to sustainably afford the home over the life of the mortgage loan.”
Financial preparation is crucial when deciding how much house you can comfortably afford. “Carefully review your budget and financial situation to ensure readiness for the heightened costs of homeownership,” says Mike Downer, broker associate at Coldwell Banker Realty in Naples, Florida. “Research and planning are essential, involving an analysis of the current housing market in your desired area to understand trends in home prices, interest rates, and affordability, along with creating a comprehensive plan outlining your budget, desired location, home features, and financing options.”
