“Save enough money, then buy a house” – this phrase is not wrong, but ever since the outbreak of the pandemic, this statement has become increasingly out of reach! With house prices continually on the rise and mortgage rates remaining high, the definition of “saving enough money” has become like a mountain peak that can never be reached, causing great stress for potential home buyers. So, what is the difference between the necessary income for buying a house before and after the pandemic? Let’s take a closer look.
According to data from the US Census Bureau, the median household annual income in 2022 was approximately $75,000. In early 2022, the median house price in the US was around $385,000, but by June of this year, the median listing price had soared to about $445,000. In other words, from early 2022 to June of this year, house prices in the US rose by nearly 15.6%.
In April 2024, the median income across the US increased by 4.87% compared to the same month of the previous year. Looking at the long term from 1960 to 2024, the average annual growth rate of wages in the US is 6.19%. A notable example is April 2021, where wage growth reached a historical high of 15.28%. However, this rate still falls short of keeping up with the pace of house price increases. It’s like houses driving at high speed while wages are stuck riding a bicycle, despite the efforts, the reality is that house prices ruthlessly leave us behind.
Using data from Realtor.com, in early 2022, assuming a household wanted to buy a house at the US median price and intended to spend only 30% of their monthly income on repayments, the required household annual income was approximately $79,000. Therefore, the median household income in early 2022 could still afford the US median house price. However, up until today, the scenario has drastically changed in terms of housing affordability.
In the US overall, mortgage rates have been gradually increasing since 2022. The typical household at the median income level faces challenges in affording a house, with housing costs exceeding 30% of their monthly income. By June 2024, the required income for buying a home had risen to about $120,000, but at the same time, the median household income had only increased to around $84,000, resulting in a staggering $36,000 deficit. This means that the minimum income required to purchase a house at the median price is almost 43% higher than the actual median income.
It’s interesting to note the significant differences in incomes needed to afford housing compared to several years ago. The challenges posed by escalating house prices are most evident in the most expensive coastal cities. Purchasing a home at the local median price has become increasingly unattainable, with the biggest discrepancies present in the Californian market.
Starting with the city with the widest income gap, Los Angeles takes the lead. Eight years ago, the median house price in Los Angeles was around $750,000. Now, this figure has jumped to $1.25 million, and the required annual income has surged from about $152,000 to $335,000. Despite a growth in median income in Los Angeles over the past few years, it still significantly lags behind house prices.
In June 2016, families looking to buy a house in Los Angeles were facing an average income deficit of around $86,000. The median household income at that time was close to $66,000, yet a yearly income of $152,000 was needed to afford the local median house price.
Today, with a median price of $1.25 million, a minimum income of $335,000 is required. However, as of June this year, the median household income is only about $95,000, leading to a widened gap of $240,000 – a jaw-dropping disparity!
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Despite subdued demand for many major coastal cities during the pandemic, with many moving to suburbs or even across states, unfortunately, the supply of housing units has dwindled. Post-pandemic, demand in coastal cities has surged again, leading to a continuous record-breaking rise in house prices.
Moving on to the second city with the largest income gap for buying homes, we turn to San Jose in Northern California, the heart of Silicon Valley. In 2016, the local median house price was around $980,000, requiring almost $200,000 in income, while the actual median household income was only $110,000, resulting in a $90,000 gap.
By June 2024, house prices had reached about $1.44 million, necessitating a income of nearly $390,000 for affordability. However, the median household income stands at just $162,000, leading to a widened gap of $228,000.
The third city taking the spotlight is San Diego, also in California. In 2016, the median house price was nearly $670,000, with an income gap of $65,000. Fast forward to 2024, where the house prices have surpassed a million, and the income gap has expanded to $174,000.
Continuing our exploration of cities with significant income disparities, we turn to Boston, where the gap has shifted from $23,000 to $123,000. Following Boston is New York, where the disparity has progressed from $19,000 to $111,000.
It’s no surprise that these cities are featured for having the largest income discrepancies – living in these top-tier urban cities has never been easy, let alone when it comes to buying a home. Despite the substantial income gaps, some individuals are still willing to tighten their belts to achieve homeownership.
In major cities, there are various properties available at different price points. With patience and seizing the right opportunity, dreams can still come true. Many home buyers don’t solely rely on their wages for purchasing a home; they might receive financial support from parents, investments, stocks, or loans. Therefore, while acquiring a home in big cities may seem challenging for young individuals, with determination, realizing that dream is still plausible. Establishing home assets through homeownership opens up opportunities for acquiring larger and better properties in the future, or even staying put, as property values tend to appreciate with time.
Next, we dive into cities that have transitioned from being affordable to unaffordable – where the median household income that was previously adequate for buying a home now falls short, resulting in a deficit by 2024!
Most of these cities are located in the Northeast or Midwest regions. Pre-pandemic, these cities had relatively lower house prices, making them accessible based on local wages. However, the influx of residents from out of state following the pandemic has led to a steep surge in house prices, surpassing the local wage growth pace.
Washington, DC tops the list, with the median household income exceeding the minimum income required to purchase a home by around $6,000 in 2016. However, by 2024, the income shortfall has widened to $39,000. The median house price escalated from $440,000 to $630,000, representing a 43% increase, while the income growth only saw approximately 35%.
The second spot on the list goes to Kansas City in Missouri, where the median income previously exceeded the minimum requirement by about $14,000. The situation has drastically shifted, with the shortfall now sitting at nearly $32,000. House prices have surged by 82.5%, while wages have only grown by 36%, showcasing a substantial disparity well in favor of house prices.
Hartford, in Connecticut, claims the third position, where the income once had a comfortable $17,000 cushion, but now stands at a deficit of $27,000. Richmond, the capital of Virginia, falls from being affordable to unaffordable, with a $36,000 income gap. Meanwhile, Milwaukee in Wisconsin goes from a positive $14,000 to a negative $30,000, marking it as the city with the lowest house prices and wage levels among these five cities. The tranquil and pleasant life in Milwaukee has been disrupted by the pandemic.
Due to soaring house prices exceeding the affordability of Americans, construction companies are diligently addressing the situation by continually reducing the size of new houses. According to data from John Burns Research & Consulting, a quarter of new homes in 2023 were downsized to lower prices. However, despite these efforts, the data from the Census Bureau shows that in 2023, new house prices increased by 2.5%, peaking at $441,000.
Reducing house prices involves constructing smaller homes or increasing the density of residential properties. Taiwan is currently facing a similar crisis, witnessing escalating house prices and unit costs. As a result, construction companies are reducing housing sizes to lower total prices, making homes more affordable. However, this trend towards smaller homes has led to a surging popularity of compact housing policies.
As a result, residential spaces now emphasize multi-functional usage, moving away from traditional distinctions where dining rooms were solely dining areas and living rooms were just living spaces. American construction companies have also engaged in space utilization techniques, such as decreasing corridor space and designing flexible living areas to enhance the livability of smaller homes.
Moreover, with evolving times, the demand for home offices has escalated, while the necessity for guest rooms has declined. Although most people desire an additional guest room, from a homebuyer’s perspective today, a functional office space is more practical.
However, varying generations may have diverse needs – while many individuals may not afford bigger homes, multi-functional spaces are increasingly becoming a viable option for Millennials. In contrast, the Baby Boomer generation may lean towards storage space to preserve cherished possessions gathered over the years.
Additionally, the rise of micro-housing units, accessory dwelling units, and other compact housing options is notable. These small-scale residences are easier and quicker to construct, providing a swift solution to the housing crisis in major cities. Nevertheless, these types of housing options yield marginal profits for developers, resulting in minimal construction, having little overall impact on the real estate market.
According to the latest real estate data, Zillow reported a 24.5% reduction in prices by sellers in June, with inventory levels 23% higher than the low point of the previous year as transactions decreased. Although inventory remains scarce compared to pre-pandemic levels, the resurgence is indeed encouraging, with the market gradually favoring buyers. Additionally, mortgage rates have started to decline, with the average 30-year fixed rate dropping to 6.81% on July 18, inching away from 7%, which brings a sense of excitement to the market. ◇