As residential real estate enters the low winter season, the average 30-year fixed-rate mortgage interest rate has rebounded to 3.18% – signaling a change from historically low rates and extremely high demand that defined an unpredictable market during the pandemic. The only thing that was predictable was the rise in house prices in the Phoenix metro area. Once known for its affordability, new research has found Phoenix to be the 15thless affordable city for housing.
READ ALSO: Top 5 Predictions for Residential Real Estate in Phoenix
Across the country, the pandemic has accelerated a major divide between home values and income. Although conventional wisdom suggests that most homebuyers are offering 1% to 3% more than asking price in competitive markets, low inventory levels and high demand have prompted some homebuyers to take desperate action. . Today, it’s not uncommon to hear of people offering far more than the seller’s asking price, with some even offering $ 1 million more than the asking price.
From 2019 to 2021, the average house price-to-income ratio rose from 4.7 to 5.4, an increase of 14.9%, more than double the recommended ratio of 2.6. In other words, houses cost 5.4 times what the average person earns in a year.
To find out how these changes affect homeowners, we analyzed publicly available data from the U.S. Census, including national household income data and median values of new home sales. All dollar values are adjusted for 2021 inflation, unless otherwise noted.
We found that since 1965, the average home value has increased from $ 171,942 to $ 374,900, an increase of 118%. Meanwhile, median household income rose only 15%, from $ 59,920 to $ 69,178 in 2021 inflation-adjusted dollars.
High and inflated real estate values mean fewer Americans are underwater on mortgages. But those same owners could be on the verge of devastation in the next real estate crash. This is especially troubling for people who bought homes during the pandemic because they had the least amount of time to pay off their mortgage.
Read on to learn more about the US home price-to-income crisis – and its potential impact on homeowners across the country.
HOUSEHOLD PRICE-INCOME RATIO STATISTICS
• Adjusted for inflation, house prices have jumped 118% since 1965, while median household income has increased only 15%.
• House prices have increased 7.6 times faster than incomes since 1965 and 3.1 times faster than incomes since 2008, which explains inflation.
• To afford a home in 2021, Americans need an average income of $ 144,192, but the current median household income is actually $ 69,178.
• The average house price-to-income ratio is 5.4, more than double the maximum of 2.6 recommended by experts. From 2019 to 2021, the pandemic dramatically increased the average house price-to-income ratio by 14.9%.
• Almost 90% of large metropolises have a house price / income ratio above the maximum recommended ratio of 2.6.
• Only six of the 50 largest metropolitan areas have a property price-to-income ratio less than or equal to the maximum recommended ratio of 2.6: Pittsburgh (2.2); Cleveland (2.4); Oklahoma City (2.5), St. Louis (2.5); Birmingham, Alabama (2.5); and Cincinnati (2.6).
• The least affordable metropolitan areas for housing are concentrated in California: Los Angeles (9.8); San José (9.1); San Francisco (8.3); and San Diego (7.8).
• From 2015 to 2020, the percentage of dwellings with underwater mortgages decreases by 54% in the most populous metropolitan areas (from an average of 12.2% to 5.6%) – probably because rising home prices have increased homeowners’ equity.
Home prices in the United States are skyrocketing, but incomes have remained relatively stable
House price-to-income ratios 1965 to 2021
The American dream of a stable job and home ownership has become increasingly elusive for Gen X, Gen Y and younger generations. Since 1965, house prices have risen 7.6 times faster than incomes.
After adjusting for inflation, an average home valued at $ 171,942 in 1965 is now worth $ 374,900, an increase of 118%. In contrast, median household income has increased only 15% since 1965: from $ 59,920 in 1965 to just $ 69,178 today.
House price-to-income ratios from 2008 to 2021
Since the last major collapse of the housing market in 2008, the average ratio of house prices to income has steadily deteriorated. Home prices have increased 3.1 times faster than incomes since 2008.
Between 2008 and 2021, the average home value climbed 25%, from $ 298,910 to $ 374,900. Meanwhile, median household income barely budged, with a modest 8% increase, from $ 63,902 to $ 69,178.
Average household price-to-income ratio is more than double what experts consider “healthy”
The average US home price-to-income ratio is 5.4, much higher than the “healthy” 2.6 recommended by experts.
The current average house price-to-income ratio means that it takes 5.4 years for potential buyers to save enough to buy a home. These sky-high house prices also mean that monthly mortgage payments put significant financial pressure on homeowners, even if they manage to save enough to buy a home.
Low-wage service workers and blue-collar workers are hardest hit by high house price-to-income ratios, according to urban economists. While high density and affordable housing is a promising solution, it is one that remains elusive in many cities.
50 largest American subways, ranked by affordability
💰 ONLY SIX METRO REGIONS HAVE AFFORDABLE HOUSING
In 2021, only six of the 50 most populous metropolitan areas in the United States have a house price-to-income ratio less than or equal to the maximum recommended ratio of 2.6:
1. Pittsburgh (2.2)
2. Cleveland (2.4)
3. Oklahoma City (2.5)
4. (tie) Saint-Louis (2.5)
4. (tie) Birmingham, Alabama (2.5)
5. Cincinnati (2.6)
The most affordable American subways for housing
US subways least affordable for housing
Since 2017, home values have grown 2.8 times faster than income, on average, in the 50 largest subways in the United States
Home prices exceed income rates in the 50 most populous cities in the United States. Since 2017, the median family income decreases in three major metropolitan areas: New Orleans, Houston, and Oklahoma City.
From 2017 to 2021, home values grew on average 17.8%, while incomes grew only 6.2% on average. In other words, house prices have increased 2.8 times faster than average incomes.
In the more expensive subways, the house price-to-income ratio has increased by 61% since 2000
In the 10 most expensive cities, the average house price-to-income ratio jumped to 6.9 in 2021, a 61% increase since 2000.
In 2000, the average home value was $ 271,707 in the 50 most populous cities. During the 2008 housing crisis, the average home value jumped to $ 304,589, an increase of 24%. Today, home values have risen by a Additional 39% to $ 376,826.
In contrast, average house prices in the 10 subways with the lowest house price-to-income ratio are 2.5 times higher than income, up just 10% from the average of 2.3 in 2000.
Current owners have more equity – which could put them under water in the next crash
Among the 50 most populous metropolitan areas, none have seen the percentage of underwater mortgages increase since 2015, likely because soaring prices actually increased homeowners’ equity.
From 2015 to 2020, the percentage of homes with underwater mortgages decreased by 54% in the most populous metropolitan areas (from 12.2% on average to 5.6%).
Cities with the largest decline in underwater mortgages include:
• Salt Lake City (1081% drop from 18.5% to 1.6%)
• Las Vegas (513% drop from 21% to 3.4%)
• Phoenix (471% decrease from 16% to 2.8%)
• Seattle (467% decrease from 10.3% to 1.2%)
• Tampa, Florida (315% decrease from 16% to 3.9%)
This overlaps our list of cities that have the lowest percentages of underwater mortgages:
• Salt Lake City (1.6%)
• Seattle (1.8%)
• Portland, Oregon (2%)
• San José, California (2.1%)
• Denver (2.6%)
While the rise in home values has helped most homeowners, some cities still struggle with high percentages of underwater mortgages, including:
• Saint-Louis (12.4%)
• New Orleans (10.5%)
• Memphis, Tennessee (10.1%)
• Cleveland (9.5%)
• Cincinnati (9.4%)
Overall, high home prices put homeowners at risk of losing their mortgages in the next housing crash. In addition, the high value of homes prevents many potential buyers from finding affordable property.
To calculate national statistics, we used estimates of median household income and new home sales values from the US Census.
To calculate house price-to-income ratios for the 50 most populous U.S. metropolitan areas, we used the Zillow Home Value Index (ZHVI) to estimate home values and estimated family income from the Department of Housing. and Urban Development.
All dollar values are adjusted for 2021 inflation, unless otherwise noted.
Note: Family income tends to be higher than household income because the U.S. Census includes households with no income in its averages. Therefore, our house price-to-income ratios by metropolitan area are probably slightly lower than they would be if we had used household income.
Therefore, we recommend caution when comparing national and metropolitan statistics from these analyzes.