The Joint Center for Housing Studies at Harvard University recently released their annual study on the state of the American housing market. According to the report released on Wednesday, home prices and mortgage rates have skyrocketed over the past year, pricing out over 2.4 million aspiring homeowners between March 2022 and March 2023.
While the median home price dipped slightly from $379,300 in March 2022 to $375,400 in March 2023, the increase in mortgage rates caused monthly payments to surge by 30%, from $1,780 to $2,300. Additionally, factoring in property taxes and insurance, the total cost of homeownership is estimated to be around $3,000 per month.
This significant cost increase translates to an annual income of at least $117,100 required to afford a median-priced home. This marks a significant change from last year’s report where a household earning $97,400 could afford a median-priced home.
One key finding from the report is that the estimated income required for homeownership varies significantly between local real-estate markets. In approximately one-third of all metros, an annual income exceeding $100,000 is needed for homeownership.
Aspiring homeowners will need to foot these unprecedented bills or consider alternatives such as renting or relocating to more affordable housing markets.
Housing Market Hardships: How Much You Need to Make to Afford a Home
The housing market has taken a hit in the wake of the U.S. Federal Reserve’s decision to increase interest rates last year, leading to exponential increases in mortgage rates and subsequent hikes in monthly payments for aspiring homeowners. According to Harvard data, the top end of the market, in areas like San Jose-Sunnyvale-Santa Clara, California, requires a minimum income of $454,000 to afford average home prices of over $1.6 million. Meanwhile, those looking to buy homes in the New York-Newark-Jersey City area face similar hurdles, requiring a minimum income of $178,000 for average home prices around $577,300.
However, for those considering buying homes in areas like Peoria, Illinois, hope remains as the median home costs only around $128,600 and requires only a minimum income of $42,000.
Despite this, the housing market continues to struggle; applications for mortgages have dropped nearly 35% in mid-June 2023 compared to last year, per the Mortgage Bankers Association. To make matters worse, the Harvard report predicts no respite in the housing market’s struggles anytime soon.
Home Prices Unlikely to Return to Pre-Pandemic Levels, Says Report
A recent report by real-estate brokerage Redfin predicts that home prices are unlikely to return to pre-pandemic levels in the near term due to a low number of homes available for purchase. The report states that new listings of homes for sale are down 25% in May compared to last year.
According to Redfin, there were only 1.4 million homes for sale in May, which is the lowest level since the company began tracking the data in 2012. The report notes that millions of homeowners have little incentive to sell their homes, given that 92% of those with an outstanding mortgage have a rate below 6%.
Additionally, Harvard notes that nearly two-thirds of outstanding mortgages carry an interest rate of less than 4%, and one-quarter of mortgages have a rate of sub-3%, compared to the 30-year rate which was averaging at 6.73% in mid-June of this year.
Despite this, the report states that home prices are unlikely to plummet like they did during the Great Recession, thanks to several factors. These include the strong job market, the continued aging of millennials into peak homebuying years, the dearth of housing available for purchase, and the low foreclosure rate.
Harvard adds that the U.S. is currently facing a shortage of at least 1.5 million housing units.
