Nov 25, 2024
If you suspect that buying a home — and keeping it — has become more expensive than ever, you’ve just nailed the essence of what a new study calls the modern American Nightmare.
Oxford Economics, an independent global economic advisory firm, reports in its November briefing that housing affordability “has dropped significantly over the last five years.” In 173 of America’s major metropolitan areas, a household now needs an average annual income of $107,700 to afford a new single-family home.
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This affordability crisis presents a daunting challenge compared to past years. Today, only 36% of U.S. households jump this financial hurdle, down from 59% in the third quarter of 2019, just before the pandemic. Back then, a combined household income of $56,800 could buy a single-family home.
In fact, the $108,000 figure doesn't square at all with real median household income: $80,610 in 2023, U.S. Census Bureau figures show.
No wonder it feels like a For Sale sign driven straight through your heart.
Why home affordability has plummeted
The affordability crisis isn’t due to one or two factors but at least four: mortgage interest rates, housing prices, property taxes and insurance. Additional costs, such as new commuting patterns and furnishings, further complicate the picture.
While the report acknowledges that mortgage rates have moderated somewhat, volatility remains. This time last year, rates for a 30-year mortgage peaked at 7.76%, compared to the record low of 2.65% in January 2021. Although rates fell to around 6.08% in late September, they climbed again to 6.78% by mid-November.
Oxford Economics forecasts short-term improvement in affordability for 2024 but expects conditions to worsen again in the medium term.
The report highlights metro areas where new home prices have hit runaway levels, such as San Jose, San Francisco and San Diego. Realtor.com reports median prices at $1.3 million (up 8.3% year-over-year) in San Jose, $1.2 million (down -7.7%) in San Francisco, and $946,500 (down -3.3%) in San Diego.
Meanwhile, U.S. home insurance premiums average $2,377 annually, with a 6% increase expected by year-end, on top of a 20% leap over the past two years, according to Realtor Magazine.
Prospective buyers face a game of financial Whac-A-Mole: when one costs go down, another rises. Often, several increase at once, and none seem to drop significantly.
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Three strategies for navigating the housing market
If these numbers have you doubting your chances of becoming a homeowner, consider these approaches:
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Explore Midwest markets. Oxford Economics identifies Cleveland, Louisville, Detroit and St. Louis as having more affordable options. For example, Cleveland’s median home price is $140,000, according to Realtor.com. Kiplinger ranks Decatur, Ill. — the city with the nation's lowest cost of living (21.2% below average) — at a median home price of $134,200.
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Minimize property taxes. While major U.S. cities like Chicago and Atlanta face soaring property taxes, many metros offer lower rates — or none at all. Ballwin, Missouri, for instance, hasn't imposed a municipal property tax in 37 years. With a median home price of $409,000, it ranks among Realtor.com’s Hottest 2024 Zip Codes.
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Utilize first-time programs. First-time buyers can benefit from loans insured by the Federal Housing Administration (FHA), which require down payments as low as 3.5%. Veterans Affairs (VA) loans often require no down payment. Additionally, IRS publication 590-B allow couples to withdraw up to $10,000 each from IRAs for a first home without incurring the 10% early withdrawal penalty.
By exploring these strategies, prospective homeowners can better navigate today’s challenging market.
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Lou Carlozo is a freelance contributor to Moneywise.
