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One major difference between April 2006 and April 2021 is the level of mortgage interest rates. In 2006 the 30-year fixed rate mortgage rate was 6.5%, more than double the level in April 2021. Lower mortgage rates increase affordability by reducing the payment to income ratio — in 2006, a household spent 25% of their income on a mortgage payment, but in 2021, that ratio dropped to 17%.
We observed an increase of 110% in home prices between 2000 and 2008 (i.e., before the financial crisis), and a decrease of 24% between 2008 and 2010 (i.e., after the financial crisis), which real estate analysts expected. However, unusually, home prices dropped by a further 18% between 2010 and 2017, while household income increased by 9% between these years. We found that since 1965, average home values have skyrocketed from $171,942 to $374,900 — a 118% increase. Meanwhile, median household income crept up just 15%, from $59,920 to $69,178 in 2021-inflation-adjusted dollars.
Statistics on Housing market in the United States
In Pittsburgh, homeownership seems even more attainable, with median home prices showing an increase of 64% and median household income showing an increase of 31% over the years. Thus, the growth rate difference between home prices and income was much lower compared to coastal metros. Although home prices showed an increase of 18% between 2010 and 2017, an increase of 14% closely followed this increase for household income.
In the pre-bubble period from 1985 through 1999, homeowners spent 19.9 percent of their monthly income on mortgage payments. Low interest rates have translated into more purchasing power for homeowners, as the cost to finance homes has gone down. In the West and Northeast, especially in the coastal metros, household income could not keep up with the growth of the housing market over the years. In the South, homeownership is still affordable; however, if the growth rate gap between home prices and household income continues to widen, home buyers might struggle. The Midwest seems to be the only remaining region where purchasing a house with little financial struggle will be possible at least in the near future. The Midwest might be the last region homeowners can realistically afford.
Housing market in the United States
Though residential property prices in the Netherlands have been on an upward trend since 2014, in August 2021, the annual house price appreciation reached the staggering 17.8 percent. In 2022 and 2023, the growth of house prices is forecasted to continue, albeit at a slower pace. From 2019 to 2021, the average house-price-to-income ratio increased from 4.7 to 5.4 — a 14.9% increase that's more than double the recommended ratio of 2.6. In other words, homes cost 5.4x what the average person earns in one year. Since 1965, home values have skyrocketed from $171,942 to $374,900 — a 118% increase. Meanwhile, median household income crept up by just 15%, from $59,920 to $69,178 in 2021-inflation-adjusted dollars.
Some lenders, for example, indicate that a home's sale price should not exceed 2.5 times your annual salary. Following this example, if your annual salary is $150,000, you should avoid buying a home that costs more than $300,000. However, individual mortgage lenders set their own price-to-borrower yearly income rules, especially in high-priced markets like San Francisco. Although the growth rate difference between home prices and household income has accelerated in recent years, they are still lower than those observed in the Western and Northeastern regions.
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Home prices continued to decrease by 24% between 2010 and 2017, whereas household income increased by 12%, reducing the growth rate gap between home prices and household income. In 1960, the price-to-income ratio for Western states was 2.1, but by 2017 it increased to 4.9. While median home prices increased by 195% in the West, median household income only increased by 26% since the 1960s. This means the growth rate of home prices is 7.5 times more than the growth rate of household income, making the Western region the least affordable region in the U.S.
Homes are increasingly unaffordable, leading to unstable housing markets where demand can't meet supply. Median home prices have increased at four times the rate of household incomes since 1960, leading to imbalanced price-to-income ratios in most major metropolitan areas. The house price ratio in the United States fluctuated between 2012 and 2022. In the U.S., the index score in the first quarter of 2022 amounted to 136.3, which means that house price growth has outpaced income growth by over 36 percent percent since 2015. Rules vary for how much house you should buy based on a your yearly income.
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The current average house-price-to-income ratio means it takes prospective home buyers 5.4 years to save enough to purchase a home. These exorbitant home prices also mean monthly mortgage payments place a major financial strain on homeowners, even if they manage to save enough to purchase a home. Between 2008 and 2021, average home values have increased by 25%, from a post-crash low of $298,910 to $374,900 today. That’s been great for smart real estate investors taking advantage of a 1031 exchange but not so much for the average American.
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Overall, high home prices put homeowners at risk of going underwater on their mortgages in the next housing crash. Additionally, pricey home values are locking many prospective home buyers out of finding affordable property. Low-wage service workers and those in blue-collar industries are hit hardest by high house-price-to-income ratios, according to urban economists. Although high-density, affordable housing is a promising solution, it’s one that remains elusive in many cities.
It appears the American Dream of homeownership is dead in many parts of the West. Get the latest real estate news and tips with our free weekly newsletter. Clever’s Concierge Team can help you compare local agents and negotiate better rates. While home prices have more than doubled over the past half-century, wages have been more or less flat. This trend is making things increasingly tough — and maybe impossible — for buyers.
Over that same period, median household income has increased from $59,920 in to $69,178 today. The price-to-income ratio is also a good parameter to judge the current affordability of homes in a region relative to how affordable it historically was. If the price-to-income ratio is going up, it means that homes are becoming less affordable. If the price-to-income ratio is declining, it means that homes are becoming more affordable. Price-to-income ratio is the ratio between the price of a median home to that of the median annual household income in a particular area. Among the 50 most populous metro areas, none saw the percentage of underwater mortgages rise since 2015 — likely because skyrocketing prices actually increased homeowners’ equity.
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