Skyrocketing Home Costs Outpace Average Income Growth

Clear Facts

• The cost to afford a median-priced home has risen twice as fast as the average household income due to inflation and high interest rates, as reported by Redfin.
• The median monthly home payment in February was $2,838, up 12% year-over-year, while the median household income was just $84,072, an increase of 6% over the last year.
• Home prices have moderated slightly since their all-time high in October, but still remain high with mortgage rates slightly under 7%, as stated by the Federal Reserve Bank of St. Louis.

The affordability of homes in America is becoming increasingly challenging, as the cost to afford a median-priced home has risen at twice the rate of the average household income. This alarming trend is fueled by inflation and high interest rates, which have significantly inflated housing expenses.

Redfin reports that the median monthly home payment in February was $2,838, marking a 12% increase year-over-year. In contrast, the median household income was just $84,072, reflecting a mere 6% increase over the last year.

“For over a decade, America has been slowly marching toward a housing affordability crisis due to chronic underbuilding, and that crisis was kicked into overdrive when the pandemic homebuying boom fueled a meteoric rise in housing prices,” Elijah de la Campa, senior economist at Redfin, said in the report.

“Now there’s another culprit squeezing homebuyers: elevated mortgage rates. We’re slowly climbing our way out of an affordability hole, but we have a long way to go. Rates have come down from their peak, and are expected to fall again by the end of the year, which should make homebuying a little more affordable and incentivize buyers to come off the sidelines.”

In the past decade, the income needed to afford a home has tracked closely with the median household income. However, this trend took a drastic turn at the start of 2022, when the required household income skyrocketed to its current median of $113,520 a year. This surge is attributed to inflation, supply constraints, and high mortgage rates.

Housing prices have moderated slightly since their all-time high in October, when the average rate for a 30-year mortgage neared 8%. However, they still remain high, with mortgage rates slightly under 7%, as stated by the Federal Reserve Bank of St. Louis.

Home prices alone have risen far higher than the rate of general inflation, with the Case-Shiller National Home Price Index increasing 6.0% in January year-over-year, up from 5.6% in December. Inflation has continued to remain elevated, most recently rising 3.2% in February, far higher than the Federal Reserve’s target of 2%.

In an attempt to tame inflation, the Fed set its federal funds rate to a range of 5.25% and 5.50%, the highest range in 23 years. This move has put upward pressure on interest rates across the economy, particularly impacting mortgage rates.

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