Housing ‘affordability has just totally collapsed,’ economist says

Housing costs are outpacing median household incomes in the U.S., further straining affordability.

Would-be homebuyers need to earn $113,520 a year to afford the typical house in the U.S. That is 35% more than what the typical household earns annually, which is $84,072, according to a new analysis by Redfin, a national real estate brokerage site.

“Since the pandemic, affordability has just totally collapsed,” said Chen Zhao, a senior economist at Redfin. 

February 2021 was the last month when the typical household earned more money than it needed to afford the median home. There’s been a deficit ever since, Zhao said.

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“That deficit hit a peak in October of 2023,” she added. “The reason why it hit a peak then is because that’s when mortgage rates peaked as well.”

Meanwhile, home prices also remained high because of an inventory crunch: the median sale price for a house was $412,778 in February 2024, according to Redfin.

The average household fell short $29,448 to afford a home in February, according to Redfin. In October 2023, households were short by $40,810. At that time, buyers needed an average income of $120,500 to afford a home.

The affordability deficit narrowed because mortgage rates have been on a consistent decline since the last peak in October, according to Zhao. At that peak, the average 30-year fixed mortgage rate hit 8% for the first time since 2000.

“It’s been a pretty big change since last October,” Zhao said. 

Other reasons such as seasonal pricing may be reflected, as home prices tend to decline in the winter months, said Jeff Ostrowski, a housing analyst at Bankrate.

However, potential buyers are still on the sidelines, said Veronica Fuentes, a certified financial planner at Northwestern Mutual.

“They’re either holding off or they’re taking their time,” she said.

Recent layoffs in the technology industry have affected some of her clients’ attitudes, Fuentes said. While her clients may not be on the chopping block, seeing their co-workers get laid off has made many of them more cautious.

“If you were laid off, could you still afford this mortgage? Do you have six months [of] emergency savings or even a year [of] emergency savings? … Can you still afford the mortgage for six months if you have no job?” Fuentes said.

In a time when a potential buyer needs to earn about $114,000 a year to afford a median-priced house in the U.S., a starter home would make the most sense for price-sensitive buyers, experts say.

A potential buyer should make about $76,000 a year to afford a starter home, which Redfin defines as a home in approximately the bottom 1/3 of the housing distribution in terms of price.

Starter homes are hard to come…