According to a recent study from HSH.com, Americans need to be earning an average of $51,000 in order to purchase a house in one of 25 cities surveyed. Perhaps unsurprisingly, the 2014 median household income was reported at $51,939.
The study results were based upon several assumptions that might not apply to the average American. These assumptions include good-to-excellent credit, a 20 percent down payment, and personal debts that do not exceed eight percent of the buyer’s salary. For Americans who do fit snuggly into these assumptions, the study offers good news. The “average” household can in fact afford a home.
The city-specific results, however, suggest a more nuanced story. Some city-dwellers are in a much better position to buy than others. The median salary in San Francisco is $77,734, a long shot from the $147,996 annual salary necessary to purchase a median-cost home. In contrast, the average income in Pittsburgh, where a $31,135 salary is suggested for homeownership, is around $50,000. Here are how median incomes and the recommended income necessary to buy a median-priced home compare in several major cities:
|CITY||RECOMMENDED INCOME||MEDIAN INCOME|
|San Diego||$103, 165||$61,933|
The Economist magazine has published several nifty graphs that visualize information on mortgage costs, renting costs and average income in 25 cities. Their data show a steep hike in housing-to-income ratios — meaning housing costs grew faster than our ability to pay — between 1999 and 2005. The spike returns to more reasonable levels, though still historically high, between 2005 and 2011. Since then we’ve seen a slow rise in that ratio across the United States, with notable differences in particular marketplaces. As mentioned, San Francisco housing has skyrocketed in cost relative to income.
Despite historically high housing costs, insanely low interest rates make homes relatively affordable these days. When these rates begin to rise, the price tag of American homes will shift with them. Zillow Chief Economist Stan Humphries predicts a concurrent change in housing costs as prices even out with income levels: “Home values will have to either remain stagnant while incomes catch up or, quite possibly, home values will have to fall in some markets. This will especially be the case in some markets that have seen strong home value appreciation.”
Translation: As it gets more expensive to borrow, asking prices for homes are likely to fall to compensate.
Recent increases in housing prices can be attributed to the basic supply and demand. As people become less entrenched in a recessionary mentality and more interested in homeownership, demand rises. In part, this is also due to our low interest rates and the current affordability of homeownership. Increase in demand has allowed prices to rise.
Supply is “stickier” than demand in the housing market; it takes longer for builders to catch up and build more. When the housing market crashed a number of homes went into foreclosure, but those households who were able to hold on to their homes did. Many of them are still holding. No one wants to sell at a loss and some homeowners are still waiting for prices to rise further before listing their homes.
At the same time, the crash took a toll on residential construction. According to National Association of Home Builder’s Chief Economist David Crowe, we shouldn’t expect to see a pre-recession level of construction for some time. Construction of single-family homes was only at 51 percent of pre-recession rates in January 2016.
No need to worry. There is a growing light at the end of our housing supply tunnel. Crowe predicts a rise to 91 percent of pre-recession construction rates by the end of 2017. Supply and demand naturally want to align, it just takes some time for the constantly shifting numbers to even out.