The housing market in the U.S. is facing a crisis of affordability as housing costs are outpacing median household incomes. It has become increasingly difficult for potential homebuyers to afford the typical house in the U.S., with the average household needing to earn $113,520 a year, which is 35% more than the typical household earns annually. This affordability issue has worsened since the pandemic, with an increasing deficit between household incomes and the cost of purchasing a home. The median sale price for a house in February 2024 was $412,778, further adding to the challenge of affordability for buyers.
The affordability deficit has narrowed slightly in recent months, with the average household falling short by $29,448 to afford a home in February, compared to $40,810 in October 2023. This improvement is attributed to a decline in mortgage rates, which have been decreasing since their peak in October. While additional factors such as seasonal pricing may also be influencing home prices, buyers are still hesitant to enter the market. Recent layoffs in industries such as technology have made potential buyers more cautious, leading them to consider factors such as emergency savings and job security before committing to a mortgage.
Experts suggest that for price-sensitive buyers, investing in a starter home may be the most practical option in the current housing market. A buyer should aim to earn around $76,000 a year to afford a starter home, which Redfin defines as being in the bottom 1/3 of the housing distribution in terms of price. However, starter homes are becoming increasingly scarce as builders have shifted away from constructing entry-level properties. In comparison to previous decades where homes were more affordable, the current market poses significant challenges for buyers seeking affordable housing options.
While the overall affordability of housing in the U.S. remains a concern, there are still certain markets where buyers can find more affordable options. Redfin identified 13 metropolitan areas where homebuyers could afford the typical home without needing to earn six figures. Detroit emerged as the most affordable market, with households needing to earn $46,168 to afford the median-priced home. Other affordable markets include Cleveland, Pittsburgh, and St. Louis, where buyers making less than $100,000 can find housing options within their budget.
Looking ahead, experts predict that borrowing costs will decrease as the Federal Reserve implements plans to cut back interest rates, potentially leading to a softening of home price growth. The increase in new listings in recent weeks suggests a growing inventory in the market, allowing buyers more options to choose from. While these developments may improve affordability to some extent, it is unlikely to completely change the current housing market landscape. Buyers are advised to consider their financial situation carefully and make informed decisions when navigating the high costs of the housing market.
