The average American wage earner needs to earn tens of thousands of dollars per year more than in the past to afford the average house in America.
According to the U.S. Census, the average American household income in 2022 was $74,580. The average home price is $431,000, according to the Federal Reserve Bank of St. Louis. Benzinga looks at why both of those averages spell trouble for the housing market.
A 20% down payment on a $431,000 house would be around $86,000 and leave roughly $345,000 in mortgage principle. In the early stages, a 7.5% annual percentage rate (APR) fixed-rate mortgage on $345,000 is about $25,000 annually in interest or a little over $2,000 per month. Most mortgage lenders want borrowers to earn triple the mortgage amount in monthly income to qualify.
The Mortgage, Income And Down Payment Squeeze Play
If the monthly interest is $2,000, the borrower would need to make $6,000 per month to afford it. That means an annual income of $72,000 so an average American wage earner can afford the interest on a loan but not principal. Taking into account the principal, taxes and insurance, and the monthly payment on the $345,000 mortgage will be somewhere north of $3,500.
That means you would need a six-figure annual income to afford the house. As recently as the late 1990s and early 2000s, a $100,000 annual income put you safely in the upper middle class. Today, you need to earn almost 50% more than the average American's annual income to buy the average house. That's assuming you are in the position to put 20% down.
This squeeze play is preventing millions of Americans from achieving their dream of purchasing a home. It's true that interest rates in the 1980s approached today's numbers, but the price of the property was so much more affordable in relation to now. Borrowing $100,000 at 7% is very different from borrowing three or four times that amount.
The Issue Is Worse In Major Metro Areas
Further complicating the affordability issue is the fact that average home prices in America's major metropolitan areas are significantly higher than the national average. The Los Angeles area, for example, had an average price around $850,000 for 2022. Even surrounding counties like San Bernardino and Riverside tipped the scales at $565,000 for an average home.
That's up 25% from 2020, when the average price in the Riverside/San Bernardino market was $411,000. Those prices sent would-be buyers into Sun Belt markets like Phoenix, which has seen the 2020 average of $333,000 shoot up by almost 50% to $477,000 in two years. Two years ago, it was $391,000 in Salt Lake City, where the average is now $569,000.
Is This A Doom Loop?
Would-by buyers are beginning to tap out of markets like Los Angeles and New York. In the immediate term, they may find more affordable prices in Sun Belt locations or Midwestern cities, but when they do, others follow. That creates a boom, which rapidly drives prices out of the reach of locals in the markets buyers are migrating to.
Suddenly, housing affordability has become an issue in markets where it wasn't before. As recently as 15 years ago, $175,000 bought a nice house in some markets where the average price is well over $400,000 now. This is all happening at a time when average worker salaries are not growing quickly enough to keep pace.
Could this be the beginning of a doom loop where future generations of Americans are frozen out of the housing market that helped their grandparents build wealth and finance education? Although the long-term future remains unclear, it appears that the good old days of low-interest rates are in the past, and high prices are here to stay. That means buyers will have to be more creative than ever in their house hunts.
Exploring Options
There is unfortunately very little you can do to alleviate the pain of high interest rates and high prices. However, if you have the luxury of being flexible in where you begin your house hunt, some markets still have home prices below the national average. You can also switch your focus to fixer-uppers, where you can use a 203k adaptive reuse loan to borrow the funds necessary to both purchase and renovate your chosen property.
If increasing your income is an issue, you can also consider building passive income through real estate investments. Many real estate crowdfunding platforms and real estate investment trusts (REITs) are open to nonaccredited investors and will let you begin building your portfolio for $100. These options all take time, but as the old saying goes, "A journey of 10,000 miles starts with one step." The sooner you start, the sooner you arrive.