Homebuying has just become more affordable for the first time since 2020, according to a new Redfin report.
The amount of money homebuyers need to earn to afford a median priced home is down 1.4% from last year, marking the first annual decline since mortgage rates set a record low in June 2020. That means homebuyers need to have an annual income of $115,454 to afford a home priced at $433,101.
Redfin attributes the decrease in the required income to afford a home to the first annual decline in mortgage rates in three years.
In August, the average interest rate on a 30-year mortgage fell 6.5% from 7.07% a year earlier. It’s continued to drop and is now at 6.09%.
Redfin Senior Economist Elijah de la Campa said with housing affordability improving for the first time in four years, now is a good time to buy a home if you can afford to because it’s unlikely to become markedly cheaper in the near future.
“Many house hunters are waiting to see if mortgage rates fall a lot further, but that probably won’t happen anytime soon,” he said. “That’s because the Fed’s latest interest rate cut and its plans for future cuts were highly anticipated, meaning they’re already mostly priced into mortgage rates.
“When the Fed cuts short-term interest rates, long-term rates like mortgage rates don’t always move down nearly as much.”
Redfin also noted that waiting may not be the best decision as home prices tend to rise over time, so waiting could mean buyers will find themselves faced with higher prices and a higher down payment. Competition could also again become a factor.
Despite last month’s improvement in housing affordability, Redfin found that the average American household still cannot afford to buy a median home, as the typical household earns around $83,853 annually — 27.4% less than the $115,454 needed to afford a median-priced home.
“A household on the median income would need to spend 41.3% of their earnings on housing to buy the median priced home,” the report said. “Any household that spends over 30% is considered ‘cost burdened.’
The report also noted that fewer than one-third of home listings are affordable for the typical U.S. household, a decline from more than half prior to the pandemic.
Redfin said this is one reason why potential homebuyers are staying on the sidelines, even with falling mortgage rates.
Year over year, home prices are up 3%, which is just 2.1% below their all-time high. Redfin says the ongoing inventory shortage continues to keep prices high, resulting in sticker shock for some buyers. Others are still waiting to see what the new NAR rules have in store and for the results of the presidential election.
The last time a typical household earned enough to afford a median priced home was in February 2021 when the median household income was $69,021 which was 5.7% more than what was needed to afford a typical home.