Housing Costs Now Make Up Almost 40% of the Average Household Income

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Home affordability has hit all-time lows. Here are practical steps you can take to reduce housing costs. 

For many Americans, buying a home is a major financial goal. However, with the rising cost of housing, it’s becoming increasingly difficult for families to make this dream a reality. According to recent statistics, housing costs now make up almost 40% of the average household income. This is a sharp increase from previous years, and it means that many people are struggling to afford even a modest home.

Why are housing costs so high?

There are several factors that have contributed to the rising cost of housing. One of the main reasons is low housing inventory. Over the past few years, there has been a shortage of homes for sale, which has driven up prices.

Additionally, low interest rates during the pandemic made it easier for people to afford higher home prices. However, this increased demand has also led to those higher prices. Plus, many people were forced to work from home, leading to an increased demand for homes.

To combat high inflation, the Fed has drastically increased interest rates. The monthly mortgage payment for a $500,000 home is over $1,000 more now than it was before the Fed began raising interest rates in March of last year.

Homeownership affordability near all-time lows

The Home Ownership Affordability Monitor (HOAM) index calculates the affordability of homes. It measures the percentage of median household income required to purchase a median-priced home in that area.

If the index number is less than 100, it indicates that the median household income is insufficient to cover the annual costs of owning a median-priced home and housing cost exceeds 30% of household income. If the index is 100 or greater, it signifies that the median household income is sufficient for a median-priced home, and the housing cost is below 30% of income.

The HOAM was above the affordability threshold from February 2019 to May 2021. Since then, it has dropped drastically to 68.6, the lowest since the Federal Reserve began monitoring homeownership affordability in January 2006.

The impact of the pandemic on the housing market has been significant. In July 2020, during the height of the pandemic, the cost of a median priced home accounted for 27.5% of a household’s income. However, by October 2022, the median home price had skyrocketed to an alarming 43.7% of the median household income, almost half of what people were earning.

Although there has been a slight improvement in the most recent data (from April 2023), with the total payment share of median income at 40.9%, it is still significantly above the recommended 30% for a household’s income allocation.

This disparity between home prices and income levels highlights the challenges many individuals and families face in trying to afford a home in these unprecedented times.

How to afford a home in the current market

If you’re looking to buy a home in the current market, there are a few things you can do to improve your chances of finding an affordable option. The first step towards achieving this is to determine how much home you can afford.

Analyze your income, expenses, and debt-to-income ratio to decide on a realistic budget. Researching various loan options and interest rates is also essential to finding a mortgage that aligns with your budget.

Additionally, it is important to save for a down payment and to minimize unnecessary expenses along the way. Owning a home may be a significant investment, but with proper planning and determination, it can be a feasible option for many. Consider applying for an FHA loan or another type of mortgage with lower upfront costs.

Finally, work with a knowledgeable real estate agent who can provide guidance and help you navigate the market with expertise. With careful planning and some savvy moves, owning a home can be within reach despite current market conditions.

How to save money on your mortgage

Another way to make homeownership more affordable is to save money on your mortgage. This can be done by comparing rates from different lenders and finding the one that offers the lowest interest rate.

Additionally, you may want to consider putting down a larger down payment or paying points. This can help you get a better interest rate and reduce the amount of interest you pay over the life of the loan.

Finally, it’s important to shop around for your homeowners insurance as well. By comparing rates from different companies, you can save hundreds of dollars per year on your insurance premiums.

The rising cost of housing is a challenge for many Americans. However, by understanding the factors that are driving up prices and taking steps to prepare yourself for the market, you can still find an affordable home. Whether you’re looking for a fixer-upper or are focused on saving money on your mortgage, there are solutions out there that can help you achieve your goal of homeownership. With the right mindset and a little bit of preparation, you can find a home that fits your budget and your lifestyle.

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