Why Homeownership in America is Becoming Almost Impossible

The dream of homeownership in America is becoming increasingly challenging, with the financial threshold for affording a typical home reaching new heights.

A recent research by Zillow, a digital real estate company, reveals that the required salary for comfortable homeownership has nearly doubled, soaring from $59,000 in 2020 to an astonishing $106,500. This surge has significantly outpaced the growth in median household income, which has risen by only 23% to $81,000 during the same period.

The Affordability Benchmark

Traditionally, housing is considered affordable if a buyer spends no more than 30% of their pre-tax income on housing costs, including mortgage payments. In 2020, with the median income at about $66,000, homeownership was within reach for a majority of American households. However, the landscape has dramatically changed, with the income required for home ownership increasing by 80%.

Wage Increase Issue

A major factor contributing to the affordability crisis is the gap between wage growth and the rising prices of homes and mortgage rates.

Data from the real estate investing platform, Arrived, indicates that even higher income earners, those in the top 30%, are finding it difficult to afford homes in major U.S. metro areas. This is a significant shift from 2001 when individuals in this income bracket could afford homes in these cities by the age of 24.

Relocation to New Areas

As a result of the affordability crisis, Americans are exploring homes in more budget-friendly regions. Cities like Pittsburgh, where an income of around $58,200 is sufficient for homeownership, emerge as more accessible options. Other relatively affordable cities include Birmingham, Alabama; Cleveland; Memphis, Tennessee; and New Orleans.

The Most Expensive Markets

Conversely, in the priciest metro areas, an annual income of at least $200,000 is necessary to afford a typical home. San Jose, California, stands out as the most expensive market, requiring a minimum income of approximately $454,300 for home affordability.

Innovative Solutions

To navigate these affordability challenges, some buyers are resorting to creative solutions like ‘house hacking’. This involves purchasing a home and renting out part of it to offset living expenses.

Additionally, Zillow’s report on housing trends reveals that half of the first-time buyers relied on financial assistance from family or friends for their initial down payment.

Improving Affordability

The escalating housing costs are primarily driven by dramatic increases in home prices, mortgage rates, and rent growth, which have all outstripped wage gains.

Zillow’s senior economist Orphe Divounguy suggests that the solution to this issue is straightforward: increase the supply of homes. While a slight ease in mortgage rates has provided some relief, the long-term key to improving affordability lies in building more homes.