WASHINGTON (TND) — First-time homebuyers are continuing to have trouble affording a home as the housing market grows more expensive with high interest rates and even higher asking prices that are driving one of the most unaffordable markets in U.S. history.
First-time buyers need a household income of nearly $120,000 to afford the median-priced home in America, and 44 of the 50 largest metro areas do not have home prices that are low enough to be considered affordable for median-earning households, according to Clever Real Estate.
A home is considered affordable if it wouldn’t cost more than 28% of a household’s annual income. In all but six U.S. metros, the median local income isn’t enough to buy a median home, even when putting 20% down.
The only cities that are considered affordable are Pittsburgh, Cleveland, St. Louis, Memphis, Tennessee, Indianapolis and Birmingham, Alabama. Four of the top five most unaffordable cities in the U.S. are in California and include Los Angeles, San Jose, San Diego and California. New York is the fifth-least affordable city to buy a home, according to Clever Real Estate.
Only four states have housing markets that are affordable for the median earner: West Virginia, Ohio, Iowa and Indiana.
The U.S. is in one of the most unaffordable housing periods ever, particularly for people looking to buy a home. List prices skyrocketed during the pandemic as the housing market took off on the back of ultra-low mortgage rates that expanded buyers’ purchasing power and ramped up competition, which led to multiple bids on limited listings and drove up sales prices.
Activity in the housing market cooled in 2023 with higher mortgage rates that came along with the Federal Reserve’s crackdown on inflation, but that didn’t bring relief in the way of home prices for buyers. The rate of growth on home prices slowed in 2023, but still grew due to a lack of inventory on the market.
Realtors and housing analysts have identified a “lock-in effect,” with so many Americans either buying or refinancing a home during the pandemic and getting locked into interest rates at 4% or lower and being unwilling to give them up. The lock-in effect has been hurting the level of existing inventory on the market, exacerbating price pressures that are also being felt from a sufficient number of new homes being built.
That trend has started to reverse some in 2024, but it hasn’t brought any relief for buyers as prices have continued to climb along with consistently higher mortgage rates. A Redfin report found that home sales prices climbed at one of the highest rates since October 2022 during the four-week period ending April 21.
“My advice for serious buyers who can afford today’s costs is to shop for your dream home and accept that this year is probably not the time to find a dream deal,” Redfin economic research lead Chen Zhao said. “Price growth may cool slightly in the coming months if mortgage rates stay high or rates might fall slightly—but overall housing costs are likely to remain elevated for the foreseeable future.”
Mortgage rates eclipsed 7% for the first time this year last week and are unlikely to cool significantly in the immediate future with the Fed hesitant to reduce its benchmark interest rates amid hot inflation reports and strong economic data. Mortgage rates tend to follow the yield on 10-year Treasurys, which are influenced by investor expectations and demand. Investors are bracing for the Fed’s benchmark interest rate staying higher for longer, which is helping keep mortgage rates near 7%.
The U.S. has a longstanding shortage in homes that experts estimate is between 3 to 5 million units. New construction had a boon during 2023 as people looking to own homes went through builders that could offer some discounts to make up for the higher interest rates, but that momentum has slowed amid higher costs or materials and labor and elevated interest rates making it harder for them to turn a profit.
Addressing the housing crisis has received a lot of attention from Congress and state-level lawmakers over the last several years with numerous hearings and legislative proposals to address the issue. However, none of those have led to action that has been able to make a dent in the affordability issues and still leaves builders with a difficult path toward ramping up supply.
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