Home buyers need to make tens of thousands of dollars more now to afford a typical home

Nationwide, households need six-figure incomes to comfortably afford the typical home for sale, according to a report by Redfin.

Last month, the nation’s home buyers needed to make about $107,000 annually, up from about $74,000 a year earlier, to afford a median-priced home, according to Redfin. That’s an increase of nearly 46%.

In the Philadelphia metropolitan area, the annual income needed to afford a home at the median sales price of $260,000 was about $70,000 last month, up from about $50,600 in October 2021. That’s a 38% increase.

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The annual household income needed to afford median household mortgage payments stayed mostly stable for years, but the income threshold started rising at the start of last year, according to Redfin. Increases in home prices and mortgage interest rates have made homes less affordable.

“It’s just become so much more difficult for people to be able to afford a home if they need a mortgage,” said Daryl Fairweather, chief economist at Redfin. The “dramatic jump” in unaffordability prevents people from becoming homeowners, she said.

Home sales have slowed in large part because fewer people can afford to buy homes.

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Housing affordability has fallen to its lowest level in more than 10 years, according to the National Association of Home Builders. From July through September, 42% of new and existing homes for sale were affordable to households making the national median income of $90,000.

Nationwide, a household’s monthly payment for a median-priced home increased by about 70% from February 2020 to October 2022, according to Redfin. In the Philadelphia region, the monthly payment increased by 51%.

Home buyers need to make more than 30% more this year than they did last year. How much necessary incomes for home buying increased ranged across metropolitan areas from almost 34% in a region outside Chicago to about 74% in western Florida, according to Redfin. Households needed to make about $74,000 in the former and more than $130,000 in the latter.

Of the 93 metropolitan areas that Redfin analyzed, the Philadelphia region had one of the smallest increases in the income households need to buy a median-priced home. And the region was among the 10 metro areas with the lowest median sales prices.

Even through home price spikes during the pandemic, the Philadelphia area has kept its reputation for being a relatively affordable place to live compared to other metro areas.

In about half of the 93 metro areas analyzed, home buyers needed to make at least $100,000 to afford the typical home last month. Households needed to make more than $400,000 in the San Francisco metro area, almost $180,000 in the New York area, and almost $140,000 in the Washington area.

The Philadelphia region was among the 20 metros with the lowest necessary incomes to afford a median-priced home.

A mortgage payment is considered affordable if a household spends no more than 30% of its income. In calculating median mortgage payments, Redfin assumed that home buyers made a 5% down payment. Redfin included principal and interest payments but not taxes or insurance.

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Mortgage interest rates more than doubled between October 2021 and last month. The average rate for a 30-year fixed-rate home loan in October 2021 was 3.1%. The average rate in October 2022 was 6.9%.

So although Redfin found that the median sale price in the Philadelphia metro area was $260,000 in both October 2021 and October 2022, the typical monthly mortgage payment grew from $1,264 to $1,749.

Mortgage rates have fallen from a high of around 7% in October and early November and are nowhere near historical highs. But recent rate increases have added significantly to home buyers’ monthly payments.

The supply of homes on the market is still low across the country, which is keeping home prices high. New listings of homes for sale are down 21% from last year nationwide and down 20% from last year in the Philadelphia metro area, according to Redfin.

On the new construction side of the market, high inflation, ongoing bottlenecks in the building material supply chain, and a lack of skilled construction workers are contributing to rising housing costs, according to the National Association of Home Builders.