The U.S. housing market is showing signs of improvement in affordability for the first time since 2020. A recent analysis revealed that homebuyers need to earn an annual income of $115,454 to afford the median-priced home at $433,101, marking a 1.4% decrease year over year. The key driver behind this improvement has been the reduction in mortgage rates.
The average interest rate on a 30-year mortgage dropped from 7.07% in August of the previous year and has since fallen further to 6.09% as of Sept. 19. Redfin Senior Economist Elijah de la Campa said, “Housing affordability is improving for the first time in four years.
If you want to buy a home and can afford to, now could be a good time.”
However, the average American household still can’t afford to buy a home. The typical household earns an estimated $83,853 per year, which is 27.4% less than the $115,454 needed for the typical house. Texas hosts three of the five metros that saw the largest drops in income needed to afford a home, with Austin leading at a 7.9% year-over-year decline.
In contrast, the East Coast is home to four of the five metros with the biggest increases, with Philadelphia topping the list at a 5.8% increase. Zillow Senior Economist Orphe Divounguy noted that although the market is seeing lower mortgage rates, more inventory, and low buyer competition, affordability remains a critical issue.
u.s. mortgage rate decreases boost affordability
“This is as good as it gets,” he emphasized. Lower home loan rates provide “a great opportunity for buyers who have been waiting,” Divounguy said. However, he warned that Federal Reserve rate cuts don’t necessarily guarantee that mortgage rates will continue to fall.
On top of lower mortgage rates, a higher inventory of homes for sale is making the market more favorable for buyers. There were 1,350,000 homes for sale by the end of August, up 0.7% from a month prior and 22.7% compared with August 2023. Redfin Chief Economist Daryl Fairweather advised that house hunters discouraged by the current market might find better conditions next year with more listings but could face higher competition.
“You’re trading one difficulty for another,” Fairweather said. Looking ahead, Goldman Sachs projects housing affordability will return to “normal levels” by 2030. Analyst Vinay Viswanathan explained that the current affordability crisis is one of the worst on record, but several economic trends indicate a potential improvement in the coming years.
These trends include decreasing mortgage rates, income growth outpacing inflation, and slower home price growth. Viswanathan anticipates a five-year period of gradual improvement, stating, “We think we will get back near a healthy level of affordability by the end of the decade, so it will be a five-year odyssey of slow normalization.”
