See below exactly how much income you would need to earn in order to afford the principal, interest, taxes and insurance payments on a median-priced home in the 50 most populous metropolitan areas.
Key takeaways:
With a combination of lower mortgage rates and seasonally-lower home prices in a majority of areas, relative home affordability improved in the third quarter of 2024 in more than half of the nation's largest housing markets.
Mortgage rates were on the decline during the period. The 30-year FRM rate used in our calculations started the third quarter at nearly seven percent, then traveled all the way down to nearly six percent, about a two-year low. There is a lagged effect for reporting sales of existing homes, so the benefits of the lower mortgage rates late in the third quarter will probably show up in modestly improved sales figures early in the fourth quarter.
Even with falling mortgage rates during the summer, existing home sales failed to pick up at all, posting annualized rates of sale of 3.96 million in July, 3.88 million in August and 3.84 million in September.
As is normally the case, the median sales price of existing homes tends to peak in June; it certainly did this year, posting a new all-time record of $426,900. After the annual peak for prices is reached, home prices usually start their seasonal declines, which historically begin in the third quarter. This phenomena returned as usual this year, and by September, the median sales price of an existing home sold had retreated by more than 5% from June's peak. However, on a national basis, the September figure was still about 3% higher than the same month a year ago.
During the third quarter, the Federal Reserve trimmed short-term interest rates by 50 basis points, the first lowering of its key policy rate since the onset of the pandemic more than four and a half years ago. While the change in policy is encouraging and should eventually help mortgage rates to decline, the initial reaction by markets has been the opposite, as long-term interest rates and mortgage rates increased markedly after the September rate cut. This is just another strong reminder that outside of extraordinary policies such as buying Treasury and Mortgage Bonds, the Fed does not control mortgage rates.
With their leveraging effect, lower mortgage rates are more important in the affordability calculation than are lower home prices. In the current "national" calculation, buying a $418,700 median home price with a 20% down payment ($334,960 loan amount) using a 30-year mortgage with a rate of 6.51% requires an annual income of $108,567.27 to qualify once typical tax and insurance costs are included. Even if we adjust the Census Bureau's most recent 5-year running estimate of family income ($92,646; American Community Survey, 2022) by 4% for 2023 and another 4% for 2024, this only lifts the income figure to a little over $100,000, still well short of the income needed to qualify to buy that median-priced home (at least nationally, as if such a home existed).
On a weekly basis, at the end of September, 30-year fixed mortgage rates were about 43 basis points lower than the quarterly average values we used in our calculations. However, even if rates were at this multi-year low of 6.08% for the entirety of the third quarter, this would only lower the annual income needed to purchase that median-priced national home to $104,544.55 -- helpful, but still short of the goal by several thousand dollars.
Outside of a major change in the economy, to current buyer demographics or a huge shift in the supply of available homes for sale, it's simply not likely that home prices will outright decline in the aggregate or by very much, even if prices in some housing markets seem to be settling somewhat. At best, buyers can hope that price increases flatten out over time while their incomes rise and mortgage rates decline all at the same time, so that more balanced buying conditions emerge. When these components might come together in beneficial fashion is anyone's guess at this point, but it doesn't seem likely we'll be seeing them any time very soon. Only time will tell.
That said, it's worth considering if the second quarter of 2024 might have been the nadir for home affordability. Mortgage rates were a little lower in the third quarter than in the second, and seasonal median home price softening lowered the income needed to purchase a median price home in 28 of the top 50 metro housing markets. Looking forward, mortgage rates seem poised to begin a long decline over time; increased inventory of homes for sale should help limit price increases as we go, and provided there is no recession, incomes should continue to increase. All should help close the affordability gap over time, but the change may be more of a rounded peak on a graph rather than a spike.
Home Price Trends
The third stanza of each year often features the start of seasonal home-price declines that usually run though the holidays. We've seen that again this year, with 32 of 50 metro areas (64%) sporting lower median home prices compared to the second quarter. This number is actually well above the same period a year ago, where just 38% of markets saw softening.
Looking at the 2Q-3Q price transition in the mid-portion of 2024, just 18 of the top 50 metros saw higher home prices. Only the Los Angeles, CA metro area saw a double-digit increase, down from 17 such sizable increases in the second quarter. The Buffalo, NY metro area was the closest runner-up with an 8.62% quarter-to-quarter increase. Because of these large gains, these two markets were the only ones where the income needed to buy in the third quarter was higher than in the second. Of the of the remaining 16 metro areas that posted home price gains, half had increases of less than a percentage point, with median home prices in several markets virtually unchanged.
On an annual comparison basis, the home price news was not nearly as favorable, at least from a homebuyer's perspective. While there were seven metro areas where home prices were lower in the third quarter of this year than last, the declines were mostly small -- two metros posted less than a one percent decline, two posted between a 1 percent and 2 percent decline, two saw declines in the 2-3 percent range, and San Antonio topped the list with a 3.31% year-to-year drop in median home price. All 43 other metros sported annual increases in values that ranged from 0.49% in the Phoenix AZ metro area to as much as 9.54% in the Providence RI market.
That said, there were no double-digit year-over-year increases, the first time no market has notched a 10% or greater annual increase since the third quarter of 2023. While that's not to say that home prices are lower or even more affordable, it does suggest that sizable price increases may no longer be sustainable in at least some markets. Put another way, it may be an indication that home prices may have topped out in those areas.
Given the majority of metros saw a quarterly decline in prices, we would expected the seasonal effect for the fourth quarter to see nearly all post quarter-to-quarter decreases in median home prices, but there will still be relatively few housing markets with outright year-over-year declines.
Salary Situation
As has been the case, home affordability is a bit of a good news/bad news situation. The good news is that a combination of seasonally-lower home prices and a drop in mortgage rates compared to the second quarter of 2024 saw improved affordability in 28 of the top 50 metro housing markets. That's not simply comparing the last quarter to the most recent one, either -- the improvement is relative to year-ago levels.
How could that be? Mortgage rates in the third quarter of 2024 were not only lower compared to the second quarter, they were also lower compared to the third quarter of last year. While it's too soon to say for sure, there's a chance that this will be the case in the fourth quarter of 2024, too.
Although the decreases in income needed to buy a home were mostly small, they ranged from 0.42% less income needed in the Jacksonville, FL area to as much as 6.41% less in the Denver, CO market. While the depth of the improvement in affordability wasn't all that significant, more so was the breadth of the decline. The 28 metros where there was affordability improvement is the most seen since the second quarter of 2020 -- the period where the pandemic was declared and home sales and prices stalled.
Of the 16 quarters that have happened since that economic hard-stop, there have been only four quarters that saw any declines in the income needed to buy a home, and only one quarter (4Q20) had as many as four markets with such an improvement. The two most recent such episodes were in the second and fourth quarters of 2023 -- and those saw only two markets each with improvement in affordability.
What does it mean in terms of dollars? Looking at the two metro examples noted above, last year in the third quarter, a prospective home buyer in the Denver metro area would have needed $168,941.33 in income to cover the Principal, Interest, Taxes and Insurance (PITI) payments on a $673,000 median-priced home (mortgage amount of $538,400 after a 20% down payment). This year? The median-priced $654,600 home would need $158,112.53 in income to cover PITI after a 20% down payment. So the good news is that relative affordability has improved; that bad news is that even if we adjust the 2022 median family income (latest available) for the area by 4% for 2023 and again for 2024 (as we did for the national figure in the Key Takeaways), this still only lifts the projected median income to $129,770.37 -- still well short of the amount needed to buy a median-priced home in the area.
With the same treatment applied to the Jacksonville, FL market, where just a 0.42% decline in income was needed this year, last year's $390,000 home purchase ($312,000 loan amount) needed $104,273.53 to cover PITI; this year, the $401,400 median priced home ($321,120 loan) needs $103,838.26 -- so just the slightest improvement. As was the case in Denver, adjusting the local median income from 2022 to 2024 levels put it at $96,255.91 -- about $7,600 short of the amount needed to see affordability achieve balance.
So the overall news is better -- seasonally lower home prices and lower mortgage rates have created lesser incomes needed for folks to participate in the market in more areas. Unfortunately, the improvement still isn't enough get home affordability back to where it needs to be. Only steady income gains, lower mortgage rates and softer (or even level) home prices will create better balance in home affordability, and that will take time.
Inventory Issues
After years of ultra-lean inventories of homes available to buy, supply conditions are finally improving. Slack sales and a somewhat greater willingness of homeowners to put their homes up for sale is starting to change the picture somewhat.
Inventory levels of homes available to buy are measured against the present rate at which they are selling, called an inventory-to-sales ratio. While useful, this measure can be misleading, since a fall off in demand -- such as might happen when mortgage rates suddenly or continually rise -- can bloat the figure upward even if no additional homes for sale come to market. That said, the National Association of Realtors reported that in September (latest sales month as of this writing) there were 23% more homes for sale this year than last, some 1.39 million units. This lifted the inventory-to-sales ratio to 4.3 months, the highest it has been in more than five years. so there are somewhat more homes available for buyers who can afford them.
It is said that the "lock-in effect" -- homeowners unwilling to sell and trade a low-rate mortgage for a higher one -- is a key factor in why there are so few existing homes for sale. While that is likely true, it's also true that home prices are also significantly higher now then they were over the last couple of years, and there's a reasonable likelihood that many wanna-be sellers would have difficulty qualifying for today's more expensive homes even if mortgage rates were measurably lower. Even a being able to make a large downpayment on a next home might not be enough to even keep the amount being financed the same, let alone lower, so there is no offset to (or relief from) the higher mortgage rates in the market today compared to a few years ago.
Even if they can meet the challenge presented by higher rates and higher home costs, sellers may face the same little-desirable-to-buy situation that buyers without homes face, and so must wait until conditions become better balanced for their needs. It's not quite a chicken-or-the-egg situation, but a combination of smaller step-up in mortgage payment (either lower rates or prices, or a combination of both) or more suitable or viable homes to buy at present prices is going to be needed over time to restore a more properly functioning existing housing market.
At least one saving grace for some sellers is that they may be able to explore avenues that have fewer barriers and better actual availability of homes for sale. For example, a seller looking to buy new construction doesn't face the limited inventory issue that continue to bedevil potential buyers of existing homes, and for that, many builders are offering price concessions and even financing assistance. Folks relocating away from crowded coastal real estate markets may also find better availability and value opportunities, too.
Inventories of homes for sale typically lean out in the fourth quarter, as holidays kick in and sellers whose homes haven't sold pull them from the market temporarily, so the I/S ratio may have shrunk a bit when we next produce these calculations. Any pulled listings usually return to the market in late winter.
How much house will your income and debt-load support? You can run your own calculations with HSH.com's How Much House Can I Afford to Buy? calculator.
Downpayment Difficulties
Potential homebuyers chasing today's markets know the problem all too well. Rising home prices mean greater amounts of savings are needed to achieve even a small downpayment. Our calculations use a 20% down payment as a base, since this eliminates the complication of factoring for the costs of Private Mortgage Insurance, where premiums are dictated by the borrower's credit strength, size of the borrower's downpayment and choice of mortgage type and term.
Want to buy the first quarter's national median-pried home with a 20% down payment? You'll need to have amassed $83,740 in savings -- and this leaves out the need to accumulate funds for mortgage closing costs and any required reserves. Even for a highly diligent saver this amount will likely take years to amass, and by then, higher home prices will likely necessitate an even larger amount.
Although the national median home price was lower this quarter than last, it's still some 3% higher than the same period a year ago. As such, while the downpayment size to reach 20% of the median price is down just slightly (-$680) compared the second quarter, it is still $2,480 more this year than last. So even a diligent saver would have had to come up with an additional $50 per week on top of other savings just to keep pace.
At the risk of being discouraging, if someone could save $1,000 per month, it would take them nearly seven full years just to reach today's 20% downpayment level; saving at twice that rate would make it about three and a half years... but in either case, the downpayment goal line will surely have moved, again as home prices tend to rise with inflation over time.
Even someone looking to get in with a minimal 3% downpayment -- available on Fannie Mae's HomeReady and Freddie Mac's Home Possible programs (and 3.5% down for FHA-backed loans) would need $12,561 and $14,655 respectively. This would shorten the savings timeframe, but a smaller downpayment on that same median-priced home means both a larger loan amount and incurring mortgage insurance costs -- so a higher income is actually required to qualify.
If you're thinking of going with one of these low-downpayment options, you'll want to see how these choices will work over time by using HSH's Low Downpayment Mortgage Comparison Calculator. You'll be able to see the costs of non-cancelable FHA mortgage insurance against the cancelable PMI costs of Fannie and Freddie offerings over any time horizon you desire. We take into account risk-based loan-level pricing adjustments, too.
Potential homebuyers of more modest means looking to buy homes often struggle to come up with even a minimum downpayment and closing costs, especially in heated markets. Help making the jump to homeownership is often available but can be tricky to find if you don't know where to look. To help would-be homebuyers, HSH offers its database of Homebuyer Assistance Programs by state, where information about these valuable programs, vital website addresses, contact info and more can be found.
