The world looks different now compared to five years ago. In 2020, the pandemic disrupted the overall economy, including the real estate market. The outbreak caused many Americans to move in search of more spacious homes. With a shortage of housing in the United States coupled with increased demand, it has led to intense competition, resulting in skyrocketing home prices in cities across the country. In most American cities today, buying a house requires a six-figure salary.
According to CNN, a recent report from Oxford Economics reveals that in the third quarter of this year, a household would need an income of $107,700 to afford a new single-family home and cover property taxes and insurance. This is nearly double the $56,800 income required to afford a new home in 2019.
The report emphasizes how difficult it has become for Americans to afford new homes in just a few years. Only 36% of American households can afford to buy, compared to 59% in the third quarter of 2019.
While the report found that home prices are rising in every U.S. city, location still plays a crucial role. San Jose, California, is identified as the least affordable metropolitan area in the United States, with a median home price of $1.89 million in the third quarter of 2024, requiring an annual income of $461,000 to afford a home. Other California cities including San Francisco, Los Angeles, and San Diego also rank among the least affordable in terms of home prices.
Cities with the least pressure on home prices are mainly located in the Midwest and surrounding areas, including Cleveland, Louisville, Detroit, and St. Louis. The report states that the required annual income for housing costs in these cities ranges from $64,600 to $75,300.
Oxford Economics assesses housing affordability by defining it as whether the monthly housing payment exceeds 28% of an individual’s income.
The report highlights that cities experiencing a significant influx of elderly residents, such as in Florida, Arizona, and South Carolina, have seen the largest declines in housing affordability over the past five years.
Another major factor contributing to the housing affordability crisis is the increase in mortgage interest rates.
Barbara Denham, senior economist at Oxford Economics, stated in a release: “While home prices have been on the rise in every metropolitan area, the increase in mortgage interest rates has more severely eroded affordability, as rates nearly doubled from 3.7% in the third quarter of 2019 to a high of 7.3% in the fourth quarter of 2023.”
As the Federal Reserve raised rates to combat inflation, mortgage interest rates (the rates charged by lenders on housing loans) soared in 2022 and 2023. Despite a downward trend since reaching a peak last year, as of early November, the average rate for a standard 30-year fixed-rate mortgage stands at 6.79%, exceeding any level between 2008 and 2022, significantly increasing monthly home buying expenses for many Americans.