The affordable housing crisis in America is well-known, and recent data illustrates how widespread the problem is. A recent study by Clever Real Estate, which offers flat-rate buying services for real estate transactions, shows that 44 out of America's 50 largest Metropolitan areas don't have "affordable" housing prices for the median-earning household.
That means nearly 90% of America's largest cities have home prices too high for the average resident to afford. Housing is generally considered to be "affordable" when it does not cost more than 28% of the resident's monthly or annual earnings. Although America's major cities and suburbs have always had areas that were characterized by luxury homes or high wealth, they also had affordable areas where middle-class workers and wage earners could afford to live.
However, several consecutive decades of rising property prices and a lack of new home construction have conspired to limit inventory in most of America's major population centers. In what will come as no surprise to anyone who lives there, Los Angeles, California was rated the least affordable American city. LA residents need to earn roughly $250,000/year to afford the area's average home.
Notably, that's just the "average home" in Los Angeles, not a mansion in Beverly Hills or Pacific Palisades. Many Angelenos are paying nearly $1,000,000 for homes that don't even offer access to good public schools. That wasn't the case as recently as 15 years ago. Yes, homes were still expensive in the aftermath of the great financial crash, but interest rates were less than half of what they are now.
Rising interest rates have greatly reduced everyone's buying power, especially impacting entry-level and first-time buyers. Today's interest rates have made once affordable homes unattainable. It is also leading to a decrease in inventory as existing homeowners with low-interest mortgages choose not to sell.
It's a tough squeeze for first-time homeowners. Treasury Secretary Janet Yellen recently lamented that it's getting "nearly impossible" to get deals done. The affordability issue extends beyond expensive cities like New York, San Francisco, and Los Angeles, as revealed by the Clever Study.
Americans are reacting the only way they know how: by moving to places where their buying dollar goes further. This is behind the rise of the Sunbelt and many other midwestern cities as destinations for Americans on the hunt for affordable housing. The six metropolitan areas listed as affordable in the Clover survey are:
1. Pittsburgh, Pennsylvania
2. Cleveland, Ohio
3. St. Louis, Missouri
4. Memphis, Tennessee
5. Indianapolis, Indiana
6. Birmingham, Alabama
Almost every city on that list has homes available for less than $300,000. In contrast, $300,000 could easily be a 20% down payment on a home in San Francisco or Boston's metropolitan areas. That explains why Zillow rated both Cleveland, Ohio, and Indianapolis, Indiana on its list of top 10 hottest housing markets of 2024. Birmingham, Alabama and Memphis, Tennessee are both prime Sunbelt markets that have been steadily growing in popularity with buyers.
After years of being "the" destination cities in America, places like New York, Los Angeles, and San Francisco are losing popularity due to sheer economics. If this trend continues, America's real estate landscape could look very different in just a few years.
