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U.S. housing affordability falls to a 3-decade low, but there is a silver lining

The Western U.S. is the most challenging area to buy a home, partly because the income required to obtain a 30-year mortgage is more than $140,000.
Image: New homes under construction in Arcola, Texas, on July 12, 2022
New homes under construction in Arcola, Texas, on July 12, 2022Mark Felix / Bloomberg via Getty Images

Housing affordability in the U.S. has fallen to its lowest level since 1989, as both mortgage rates and home prices have surged, while income growth crawls at a much slower place.

For the first time, median home prices have eclipsed $400,000, landing at $440,300 in the second quarter of 2022, according to data from the Federal Reserve Bank of St. Louis.

Meanwhile, 30-year fixed mortgage rates were 5.60% in June, compared with 3.03% just one year ago. That increase is due in part to the Federal Reserve's decision to raise its key interest rate — which has happened four times so far this year — as it seeks to fight spiraling inflation.

The National Association of Realtors (NAR) defines a qualifying income, or the income necessary to afford a mortgage, as being one that allows a homeowner to put no more than 25% of family income toward the monthly payment for a 30-year fixed mortgage loan, including a 20% down payment.

Today, the association says a qualifying annual income in the U.S. is $93,312. While a monthly mortgage payment climbed 53.7% over the past year, median family incomes rose by just 5.8%, it said. 

“The fast rising home prices and the high mortgage rate cramped housing affordability in June to its worst in over 30 years," Lawrence Yun, chief economist at the National Association of Realtors, said in a statement. "More supply is clearly needed to moderate home price growth to give income time to catch up."

States in the Western U.S. are now significantly less affordable than the rest of the country. There, a qualifying income has hit $141,552, according to the NAR. That compares with a median family income of $98,498 for the region.

The data suggest the Midwest is the most affordable place to buy a home. Median family income there as of June is $90,650, according to the NAR, while the qualifying income determining whether a family can afford a mortgage is $68,496.

The home-buying market has slowed down considerably in recent weeks as the barrier to entry for new buyers has gotten tougher, the Mortgage Bankers Association said Wednesday.

“The purchase market continues to experience a slowdown, despite the strong job market," it said. "Activity has now fallen in five of the last six weeks, as buyers remain on the sidelines due to still-challenging affordability conditions and doubts about the strength of the economy.” 

Yun added that it is possible the worst of the affordability crisis may have already passed.

"Mortgage rates have trended lower in recent weeks due to falling gasoline prices and a slight deceleration in consumer price inflation," he said. "Still, housing affordability will be an ongoing challenge until more supply reaches the market.”