The housing market is becoming increasingly challenging for homebuyers as rising prices and higher mortgage rates make affordability more difficult, according to recent data.
Despite these hurdles, home purchases are still occurring, with around 4 million expected to be sold this year. However, the combination of escalating mortgage rates and the limited availability of homes, which drives up prices and triggers bidding wars, has significantly strained buyers’ finances.
A “For Sale” sign is displayed in front of a house in Westwood, Massachusetts, on October 6, 2020.
People are now borrowing much more money for homes at substantially higher interest rates compared to a few years ago. Overall, a homebuyer’s purchasing power has roughly halved since the end of 2020.
In December 2020, mortgage rates reached historic lows, with a 30-year fixed-rate mortgage available at 2.68%, a significant drop from 3.78% the previous year.
Currently, the average interest rate on a 30-year fixed-rate mortgage is 7.63%, according to government-backed lender Fannie Mae.
Home prices have also surged. As of the second quarter of this year, the median sale price of a single-family home exceeds $416,000, up from just under $360,000 in late 2020.
U.S. home price indexes are at all-time highs by some measures.
Lawrence Yun, chief economist for the National Association of Realtors, noted that in late 2020, the monthly mortgage payment for a typical, newly sold home was around $1,100 in principal and interest. Now, it’s about twice that amount.
The NAR estimates that a buyer today needs an annual income of $107,232 to afford a median-priced home. This calculation assumes recent mortgage rates, a 20% down payment, and dedicating 25% of gross monthly income to housing expenses.
This estimate is somewhat conservative, as many people spend more than 25% of their income on housing costs, and home prices vary widely across the country. Nevertheless, it highlights the increasing difficulty of affording a home and maintaining financial security.
In 2022, the U.S. Census Bureau reported a real median household income of $74,580.
“If you don’t make six figures, it’s going to be really tough” to afford a home in many markets, Yun told NBC News.
