$107,000 per year.
That’s how much the average person needs to earn annually to afford a typical U.S. home in 2022. That's a 46% increase from one year ago, according to Redfin.
Unfortunately, only 34% of Americans earn more than $100,000, according to data from The Motley Fool. However, if you have a spouse and two children, you may be closer to $107,000. The data shows that four-person families average $105,901 in household income. However, two-person families average only $75,143 in family income.
What’s especially surprising is how quickly homes have become unaffordable for so many Americans in such a short time.
Why is this happening?
Nicole Bachaud, a senior economist for Zillow, puts it succinctly: "Inventory remains tight, real income growth is dismal, mortgage rates show no signs of dropping.”
Of these factors, the high mortgage rates often affect affordability the most. Oxford Economics reports, “Our Housing Affordability Indices showed affordability worsened in the U.S. and Canada in Q2 due to sharply higher mortgage rates.” Interest rates are about double what they were this time last year and the highest in 14 years. A couple of percentage points might not seem like much, but higher interest rates mean higher monthly mortgage payments.
With rampant inflation driving up prices on groceries and other basic items, Americans are less able to pay more for a home at a much higher interest rate.
Will home affordability return?
Zillow shared new research about home values with the dismal prediction that “home affordability will never recover.” Their data shows home values are just about 25% higher than what would be considered affordable. In other words, house prices would have to drop 25% to return to previous affordability norms, which seems unlikely.
According to an article from Barrons, “We are nowhere near having an oversupply of homes on the market, which would be necessary for a significant price fall.”
To improve affordability on a national scale, we need more home inventory, something many different state and local governments are working to improve. Affordability will also depend on your location and income.
Many overpriced markets will likely fall in 2023. People who can switch jobs or industries to the private sector could increase their wages and use their higher income to make homeownership more possible. Even if a higher income seems impossible, don’t be discouraged. With long-term planning, consistent savings, and some sacrifice, homeownership can still be in the cards for many Americans.
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Making a long-term game plan
If you're one of the Americans who feel like they cannot afford a house right now and don’t see the potential for wage growth, it's time to make a long-term game plan. Remember, buying a home might still be the height of the American dream, but it's far more important to be financially stable. Furthermore, it's not worth it to own a home if it's cost-prohibitive and you can't enjoy it. So, if it's one of your goals to be a homeowner someday, here are a few ideas.
1. Live with family and save
Many people choose to live with family, like in their parents’ basement, while saving up for a home. Living with family might not be ideal, but 58% of people ages 18 to 24 currently do it. However, if it's an option for you, consider it, as long as it won't negatively impact your older family members.
The goal should be to save up a down payment as quickly as possible while you don’t have a rent or mortgage payment. The National Association of Realtors says, “The typical down payment for first-time buyers has ranged between 6 and 7% since 2018.”
Many people think you need 20% down to purchase a home, but that’s not true. You can buy a home with less than 20% down; you might have an additional expense called private mortgage insurance.
That’s why it’s important to run the numbers, decide how much home you can afford, and then calculate a down payment. The average price for an existing home as of October 2022 is $379,100, an increase of 6.6% from a year ago. A 10% downpayment on a home that price would be $37,910 or around $2,100 per month saved for 18 months. It makes your goal more manageable if you don’t have a mortgage or rent payment because you’re living with family.
2. Boost income with a side hustle
Saving for a house is a great reason to join the 40% of Americans who have a side hustle. A Zapier report found “Americans who have a side hustle make, on average, $12,689 per year from it.” Furthermore, the data shows they average 13.4 hours a week working on it.
Side income can go a long way in helping you save for a downpayment and closing costs. The good news is working those extra hours doesn’t have to be forever. You can do it temporarily for a year or two until you meet your savings goals.
3. Be flexible and move
Did you know that many cities across the U.S. will pay you to move there? There are numerous incentive programs, especially for remote workers.
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For example, you can apply to a program in Topeka, Kansas and get up to $15,000 if you want to relocate and buy a home. West Virginia will give you $12,000 cash for moving there - $10,000 your first year and $2,000 your second year, no strings attached. Tulsa, Oklahoma, will give you $10,000 cash plus other perks like free desk space. Natchez, Mississippi, offers $6,000 cash and $2,500 in relocation expenses.
These are only a couple of examples of cities offering moving incentives. Many of them are in more rural or lower cost-of-living areas in the U.S., which means the cash they offer can go a long way in helping you buy your home.
The future of home affordability
The real estate landscape will likely change in 2023 as the nation trends toward a recession and potentially a buyer’s market by the end of 2023. That could help some buyers afford a home.
Until then, it’s wise to get hyper-focused on your goal if you dream of homeownership. You might need to get creative – like working an extra job, moving in with family temporarily, moving to a cheaper location, or buying a home with an ADU.