Income Gap Widens: Americans Must Earn $40,000 Above Average to Buy a Home in 2023

According to new data from Redfin, the average American homebuyer must now earn a staggering $114,627 to afford the median-priced home in the United States. This figure represents an increase of 15% ($15,285) from just a year ago, and an alarming rise of over 50% since the start of the COVID-19 pandemic. In fact, this is the highest level of income ever recorded as a requirement for purchasing a home.

It's clear that the rising cost of housing can be attributed to a combination of skyrocketing mortgage rates and escalating home prices. In August, the average rate on a 30-year fixed mortgage stood at a daunting 7.07%. Since then, rates have climbed even further, reaching a peak of 7.57% during the week ending October 12. These rates are the highest we've seen in over 20 years. As a result, the demand for homes has been dampened, but unfortunately, the low inventory in the market has caused prices to continue to surge.

Looking at the numbers, the median price for a home in the United States was approximately $420,000 in August. Although this represents a year-over-year increase of only 3%, it's worth noting that it is just $12,000 shy of the all-time high reached in mid-2022. This, coupled with the fact that the typical American homebuyer now faces a monthly mortgage payment of $2,866, indicates an all-time high in housing costs. In comparison, this figure has surged by 20% from $2,395 in the previous year, and it had already experienced significant growth from the beginning of the pandemic. For instance, back in August 2020, when mortgage rates were unusually low and home prices had yet to skyrocket, the typical monthly payment amounted to a much more manageable $1,581. At that time, homebuyers needed to earn just $75,000 per year to afford the median-priced home.

Now let's consider the financial reality for the typical American household. The most recent data from 2022 reveals that the median household income in the United States was approximately $75,000. This means that the average American household earns about $40,000 less than what is required to buy a home at current market prices. Even though hourly wages have seen a modest 5% increase over the past year, it is nowhere near enough to keep pace with the rising cost of housing.

Of course, there are some homebuyers who are better positioned to navigate these challenges. Cash buyers and move-up buyers, for example, are less affected by high mortgage rates, and they generally possess higher incomes that meet or exceed the purchasing requirements. Additionally, those who are selling a home to buy another one may have built up equity, somewhat alleviating the burden of soaring monthly payments. However, it is important to note that individuals who purchased a home during the peak of the pandemic-era market with ultra-low mortgage rates may be facing a double whammy, as they not only surrender their low rate but may also incur losses on their home's value.

Now let's take a closer look at some specific metropolitan areas. In Miami and Newark, NJ, homebuyers must now earn 33% more than they did a year ago in order to afford a typical home. Both of these cities witnessed the biggest percentage increase among major metropolitan areas in the United States. To afford the median mortgage payment of $3,580 in Miami, buyers need to earn approximately $143,000 annually. Similarly, in Newark, buyers would need an income of roughly $160,000 to afford the area's monthly payment of $3,989.

Other metropolitan areas that have experienced increases of over 30% in the necessary income include Bridgeport, CT ($183,000); Dayton, OH ($60,000); Rochester, NY ($66,000); and Hartford, CT ($95,000). It is worth noting that rising mortgage rates have had an impact on the income needed to buy a home in every major metropolitan area, even in places where home prices have declined over the past year.

Interestingly, certain pandemic homebuying hotspots such as Austin, TX, and Boise, ID have experienced smaller increases in the necessary income. In Austin, buyers must now earn $126,000, representing an 8% increase from a year ago. Likewise, in Boise, the necessary income has risen 9% to $127,000. These figures are noteworthy because both cities saw a surge in demand during the pandemic as remote workers flocked to these areas. Salt Lake City, Fort Worth, TX, and Lakeland, FL also witnessed relatively modest increases of approximately 13% each. It is important to acknowledge that home prices have actually decreased in these metropolitan areas compared to a year ago.

The data indicates that homebuyers must now earn six figures in half of the major metropolitan areas across the country. In fact, in 50 out of 100 metropolitan areas analyzed, a minimum annual income of $100,000 is required to afford the median-priced home. Across the entire country, buyers must earn at least $50,000 to meet the threshold.

Turning our attention to the most expensive housing markets, it becomes clear that astronomical incomes are necessary for homeownership. In San Francisco and San Jose, CA, buyers now need to earn over $400,000 to afford the median-priced home, representing an increase of nearly 25% from the previous year. Unsurprisingly, the next five cities on the list are also located in California: Anaheim ($300,000), Oakland ($250,000), San Diego ($241,000), Los Angeles ($237,000), and Oxnard ($233,000).

On the other end of the spectrum, the Rust Belt cities require the lowest income to afford a home, although the necessary income has still increased from last year. In Detroit, buyers must earn approximately $52,000, reflecting a 19% jump from a year ago. Following Detroit, Akron, Dayton, Cleveland (all in Ohio), and Little Rock, AR, all require an annual income of approximately $60,000 to purchase a home.

In conclusion, the Redfin data paints a concerning picture of the affordability crisis in the American housing market. The astronomical income requirements, coupled with rising mortgage rates and escalating home prices, make it increasingly difficult for the average American to afford a home. While some buyers can navigate these challenges more easily, the majority of households struggle to meet the necessary income levels. As the market continues to evolve, it remains to be seen how policymakers and industry stakeholders will address this pressing issue and work towards creating a more accessible and affordable housing market for all Americans.