In terms of purchasing a dwelling, affordability is gradually improving.
Households in the U.S. with a median income — roughly $86,300 — now have the means to afford a $331,483 property, reflecting an increase of $30,302 from $301,181 last year, as reported by a new study by Zillow. When Zillow refers to “afford,” it indicates that the monthly mortgage payment, covering insurance and property taxes, should be less than 30% of a household’s income.
“An increase of $30,000 in purchasing power can open opportunities for different neighborhoods, larger homes, or homes with fewer trade-offs,” the study notes.
The enhancement is at least in part owing to gradually decreasing interest rates. The average rate for a fixed 30-year mortgage was 5.99% as of February 27 but has since risen to 6.14%, as per Mortgage News Daily. A year prior, it stood at 6.79%.
For mortgages, a reduction of even 0.5 percentage points can have an impact, noted Kara Ng, a Zillow senior economist and report author.
“As a rough estimate, a half-point reduction in mortgage rates may translate to savings of approximately $1,000 annually for an average U.S. homeowner,” Ng remarked.
A decline of 1 percentage point in rates could increase the number of households capable of purchasing a home by about 5.5 million households, including around 1.6 million renters who could transition into first-time homebuyers, according to the National Association of Realtors. NAR stated that the income estimated to afford a median-priced home was calculated assuming a 30-year mortgage, 10% down payment, and a mortgage payment constituting 25% of income, using both a 7% and a 6% mortgage rate.
Median-priced homes remain unaffordable
However, affordability remains tight. Although the amount a median-income household can afford is more than a year ago, it still lags behind the median price of a single-family home, which reached $400,300 in January, per NAR.
Based on that price and the average mortgage rate of 6.19% in January, buyers would require an income of $94,032 to qualify for financing, according to NAR’s affordability index. This calculation also assumes a 20% down payment of $80,060. Additionally, lenders consider more than just income when deciding on loan approvals, taking into account factors such as credit scores, credit histories, and outstanding debts.
This income requirement is lower compared to the previous year: When the average mortgage rate was 7.04% and the median home price was $398,100, buyers needed an income of $102,096 to qualify, as shown by NAR’s affordability index.
Meanwhile, housing values have escalated at a much faster rate than household incomes. From 2000 to 2024, median per-capita income experienced an increase of around 155%, whereas median home prices surged by approximately 207%, according to a recent analysis by the Federal Reserve Bank of St. Louis. Additionally, mortgage rates skyrocketed from less than 3% in mid-2021 to almost 8% in October 2023.
“Buyers continue to feel the effects of swift price increases during the pandemic as well as mortgage rates still significantly higher than those at the beginning of this decade,” Ng remarked.
Increased buyer presence could elevate prices
Furthermore, enhanced affordability is supported by better inventory levels, with 6% more homes available in January than the same time last year, according to the Zillow report. However, a persistent housing deficit remains an issue.
Better affordability is likely to attract more potential buyers this spring.
“If housing supply does not increase, these new potential buyers entering the market may merely drive home prices up,” remarked Lawrence Yun, NAR’s chief economist, in a January statement concerning pending home sales and rising affordability.
