Home Affordability Improves, But Still Trails Rising Prices & Median Income

The housing market is showing tentative signs of improvement for typical American households. A new report from Zillow indicates that median-income homebuyers – those earning around $86,300 annually – can now afford a home priced $30,302 higher than they could a year ago, bringing the affordable price point to $331,483. This shift, while modest, represents a notable change in the landscape of home affordability, driven largely by fluctuations in mortgage rates.

The calculation of affordability, as defined by Zillow, centers on ensuring the monthly mortgage payment – encompassing principal, interest, property taxes, and homeowner’s insurance – remains below 30% of a household’s income. This benchmark is a common standard used in financial planning and lending. The $30,000 increase in buying power, as highlighted in the Zillow report, could potentially open doors to different neighborhoods, larger homes, or properties requiring fewer compromises for prospective buyers.

A key factor contributing to this increased affordability is the recent easing of mortgage rates. As of February 27, the average rate for a 30-year fixed mortgage stood at 5.99%, according to CNBC, though it has since edged up slightly to 6.14% as of March 1, according to Mortgage News Daily. This is down from 6.79% a year prior. Even compact changes in interest rates can have a significant impact on affordability. Kara Ng, senior economist at Zillow and author of the report, estimates that a half-percentage-point drop in mortgage rates could save a typical U.S. Homeowner approximately $1,000 annually.

The National Association of Realtors (NAR) suggests that a 1 percentage point decrease in mortgage rates could expand the pool of potential homebuyers by roughly 5.5 million households. This includes an estimated 1.6 million renters who could then qualify for their first home purchase. NAR’s calculations, based on a 7% and 6% mortgage rate scenario, highlight the sensitivity of homeownership accessibility to interest rate changes. You can find more details on NAR’s analysis here.

Despite these improvements, affordability remains a significant hurdle for many. While the amount a median-income household can afford has increased, it still falls short of the median price of a single-family home, which was $400,300 in January, according to NAR. To qualify for a mortgage on a home at that price, buyers would currently need an income of approximately $94,032, assuming a 20% down payment ($80,060) and a 6.19% mortgage rate (the January average).

It’s important to note that income is not the sole determinant in mortgage approval. Lenders also consider credit scores, credit history, and outstanding debt. The NAR’s Housing Affordability Index provides a detailed breakdown of these factors.

The current affordability challenges are rooted in long-term trends. A recent study from the Federal Reserve Bank of St. Louis reveals that, from 2000 to 2024, median home prices increased by approximately 207%, while median per-capita income grew by around 155%. This disparity, coupled with the sharp rise in mortgage rates from below 3% in mid-2021 to nearly 8% in October 2023, has created a particularly challenging environment for prospective homebuyers. As Zillow’s Ng points out, buyers are still grappling with the effects of rapid price increases during the pandemic and elevated mortgage rates compared to earlier in the decade.

A slight increase in housing inventory – 6% more homes on the market in January compared to the previous year, according to Zillow – is offering some relief. However, a broader housing shortage persists. This limited supply, combined with improved affordability and increased buyer demand, could potentially lead to upward pressure on home prices. Lawrence Yun, NAR chief economist, cautioned in a January release that unless housing supply increases significantly, the influx of new buyers could simply drive prices higher.

The coming months will be crucial in determining the trajectory of the housing market. Key factors to watch include the continued evolution of mortgage rates, the pace of new home construction, and the overall health of the economy. The Federal Reserve’s monetary policy decisions will undoubtedly play a significant role in shaping mortgage rates. Any changes in government policies related to housing affordability, such as tax credits or down payment assistance programs, could also influence the market. The interplay between these factors will ultimately determine whether the recent gains in affordability are sustained or reversed.