April is National Financial Literacy Month. To mark the occasion, MarketWatch will publish a series of “Financial Fitness” articles to help readers improve their fiscal health, and offer advice on how to save, invest and spend their money wisely. Read more here.
Let’s pick a round number. How much money do you need to make to afford a $1 million home? And what about a $500,000 home?
Both of those figures are obviously higher than the $363,000 median price for a home in the U.S., but an analysis by MarketWatch based on Realtor.com data helps demystify those big, bold house prices.
Mortgage rates are falling to their lowest level in two months, but that’s not doing much for home buyers, who may be frustrated by the lack of homes for sale on the market — not to mention the fact that home prices are back on the rise.
A new report from Zillow
on Thursday revealed that the typical home’s value in March rose by 0.9% from the previous month. It’s the strongest number since June 2022, before the Federal Reserve hiked interest rates and sent mortgage rates shooting up.
“‘This month’s turnaround confirms that market conditions have swung from a slow seller’s market in late 2022 to a typical springtime seller’s market, with remarkable speed.’”
“This month’s turnaround confirms that market conditions have swung from a slow seller’s market in late 2022 to a typical springtime seller’s market, with remarkable speed,” Jeff Tucker, senior economist at Zillow, wrote in the report.
For buyers on the hunt, budget calculators on different websites and consultations with lenders will help them understand what they can afford on their income, or with their assets.
But for casual browsers hoping to prep themselves for the spring home-buying season, just how much do they need to make to afford their dream home?
MarketWatch worked with data from Realtor.com
for this story.
First, the playing field: We’re talking about a situation where a buyer is looking at putting 10% down as payment (the median), taking out a 30-year fixed-rate mortgage at 6.32%, paying a 1.72% tax and insurance rate (including effective tax rate and home insurance as a percent of home price), and making sure that the maximum share of income that goes toward the payment is cut off at 30%.
How much income to afford a $500,000 home?
To afford a $500,000 home, a person would typically need to make about $140,000 a year, said Realtor.com economic data analyst Hannah Jones.
The principal and interest payments would total $2,791 per month, and with taxes and insurance, that number comes up to $3,508. By making sure only 30% of income is being allocated toward that amount, a person would have to make $140,312, Jones calculated.
How much income to afford a $1 million home?
For a $1 million home in a big city like New York City or San Francisco, a person would have to make at least $281,000 a year, Jones said.
The principal and interest payments would total $5,582 per month, and with taxes and insurance, that number comes out to $7,015. By making sure only 30% of income is being allocated toward that amount, a person would have to make $280,625, Jones said.
Bear in mind that $1 million homes are becoming less common, Redfin said in a March note, as homes lose value amid the housing market’s cooling down.
How much income to afford a median-priced home?
For an existing home — which carries a median price of $363,000, according to the National Association of Realtors — a person would need to earn an income of $101,000, Jones calculated.
The principal and interest payments would total $2,026 per month, and with taxes and insurance, that number comes out to $2,547. By making sure only 30% of income is being allocated toward that amount, a person would have to make $101,867.
Many buyers may be considering a new home, given that there is currently a tight supply of existing homes.
Rick Palacios Jr., director of research and managing principal at John Burns Research and Consulting, last month detailed how the building industry’s share of all sales has climbed considerably since the Great Recession.
For a new home — which comes at the price tag of $438,200, according to the Census Bureau — a person would need to earn an income of nearly $123,000, Jones said.
The principal and interest payments would total $2,446 per month, and with taxes and insurance, that number comes up to $3,074. By making sure only 30% of income is being allocated toward that amount, a person would have to make $122,970, Jones said.
The average home buyer needs to earn more than the median income to afford a home. Despite a slowdown in the housing market, homes are still expensive for many people.
“For each of these price points, the minimum income required to stay in line with affordability recommendations is well above the national median,” Jones noted.
Real median household income in the U.S. was $70,784 as of 2021, according to the latest figures from the Census Bureau.
“Prospective home buyers continue to be constrained by both high home prices and high mortgage rates. Though home-price growth has slowed, the national median listing price in March 2023 was nearly 33% higher than three years earlier,” Jones noted.
‘Affordability conditions will have to improve drastically’
Home prices have exceeded inflation, found a separate report from Clever, a real-estate data company.
“The most sobering statistic is that home prices have continued to severely outpace inflation,” the report said. “Comparing January 1970 to June 2022, the last month for which we have full data, median home sale prices rose 1,858% while inflation, determined by the price of overall goods, rose … 677%.”
Comparing the scenarios for baby boomers and millennials turning 33 and looking for their first home, Clever found that in 1988, the average boomer would be looking at a home with a median price tag of $110,000, with a median annual income of $27,230 — a home-price-to-income ratio of 4. In 2022, the average millennial looking at a home at the median price would find that the gulf had widened even more: A new home with a price tag of $430,000 on a $70,000 annual salary had a home-price-to-income ratio of more than 6.
“‘Affordability conditions will have to improve drastically, likely via both lower home prices and falling mortgage rates, to see buyers return to the market en masse.’”
Baby boomers today make up 39% of home buyers, according to a recent NAR report, displacing millennials from the top spot. The majority are repeat buyers who have equity in their homes that enables them to buy their ideal home, NAR’s Jessica Lautz noted then.
Meanwhile, the number of homes on the market available for sale is dwindling: The number of new listings fell by 22.3% in March, as compared to a year earlier, Zillow said.
“The most likely reason for scarce listings is that homeowners don’t want to let go of their very low mortgage rates — often around 3% — in an environment where they’d need to start paying 6% or more on a new 30-year loan,” Zillow’s Tucker added.
Overall, “the market has pushed past the absolute affordability limit for many buyers, resulting in lower buyer demand and lower market participation,” Jones said. “Affordability conditions will have to improve drastically, likely via both lower home prices and falling mortgage rates, to see buyers return to the market en masse.”
Realtor.com is operated by News Corp subsidiary Move Inc., and MarketWatch is a unit of Dow Jones, also a subsidiary of News Corp.