Home Sweet Homeless: Why the American Dream Is Out of Reach for Many

Can Americans afford houses? Not only can most home buyers not afford a mortgage loan, but the housing market has become 31% less affordable over the past few years.

A new study shows that most prospective home buyers can’t afford to purchase a new home in 2022, as monthly housing costs have surpassed the median qualifying income for a mortgage loan.

Happy couple opening boxes
Image Credit: Wavebreakmedia via DepositPhotos.com.

Housing Prices Continue To Climb

With increasing mortgage rates and persistently high inflation that strain many family budgets, affordability has become a top priority for new home buyers.

Although the drop in fuel prices over the summer gave people a certain relief, housing prices in the US continue to climb, with some experts predicting that the housing market bubble is about to burst.

Whether that is the case or not, prices of new and existing homes are likely to cool off in the coming months. However, this does not mean that homes will become more affordable.

On the contrary – unless there is a steep drop in prices and mortgage rates, or a considerable rise in wages, or some combination of the two, buying a home in the near future will be just as difficult as it is now for most people.

An index that compares sales prices to median family income clearly shows that purchasing a new home has become less affordable in 2022, compared to just a few years ago.

Moreover, it reveals that the affordability of homes has been dropping at increasing rates since 2020.

The index was developed by the analyst team at BestBrokers in order to measure the cost of buying a new home relative to the amount buyers are actually able to pay. It shows that since the beginning of 2022, the average family income has not been sufficient to meet mortgage payments.

In other words, families earn less than what is required to pay for their newly-purchased homes.

Affordability Index

The Affordability Index measures the monthly costs associated with purchasing a home relative to the monthly income of a typical family in the United States.

It does not account for regional differences but uses national average mortgage rates, sales prices, and median income rates. Best Brokers used official statistics from the U.S. Bureau of the Census, the U.S. Department of Housing and Urban Development, and mortgage rates from the Federal Reserve Economic Data.

The index reveals housing in the US becomes 31% less affordable in Q3 2022 YoY.

Prospective Home Buyers

Money coach Myra Alport says prospective homeowners shouldn’t give up; “First of all, don’t give up!  Be patient, realistic, and educate yourself!  There are many low down-payment options for first-time home buyers or those with less than stellar credit.  And, don’t be dissuaded if you haven’t saved 20% to avoid private mortgage insurance.  Learn about federally subsidized loans: FHA, Freddie Mac, Fannie Mae, USDA, and VA.  Even ARMs (adjustable rate mortgages) are making a comeback with low(er) introductory rates. “

Be Realistic

However, prospective homeowners should be realistic.
She continues, “In today’s real estate market with higher mortgage rates, understand that you may not be able to buy as much home as you would like.  Check your ego at the door – what, realistically, are you willing to give up to get your dream home?  That 4th bedroom or extra bath?  A basement or second floor?   Making a list of your needs and wants will help you further define your areas of compromise.  Sellers today are more willing to make concessions such as paying appraisal and inspection fees, closing costs, attorney costs, and even home repairs to get their homes sold if they’ve been on the market for a while.   If you don’t ask, you won’t get!  An experienced realtor can be your best friend.”
Kevin Lao, Financial Planner at Imagine Financial Security, LLC, says timing might be key to homeowners wishing to purchase a home, “Don’t feel like you need to rush into buying a home…in some markets, we might see some price reductions to match up with current interest rates.  Or, rates could drop at some point in the not-so-distant future.  Or, both. I’m not against trying to time the market, but if you can be patient, I would recommend it.”
Michael R. Acosta, CFP, ChFC, CSLP, acknowledges the desire for many to buy their own home, “Home Ownership is still the American Dream and a lofty goal for most.” However, “With that being said, the common question is, “is now still a good time to buy a home?”  In my opinion, it’s always a good time to purchase a home so long as it fits within the cash flow budget and accomplishes your goal.  Yes, interest rates are relatively higher today than they were two years ago, but homeowners can always refinance their mortgage rate when rates drop, which would ultimately reduce their monthly mortgage payment.”

Housing Affordability Index

There are a number of affordability indexes, all of which are used to assess whether people can afford to purchase a certain item. When it comes to purchasing a home, multiple factors affect buyers’ ability to pay for the property they want.

BestBrokers created a Housing Affordability Index modeled after similar indexes but with a couple of different features. It measures whether a typical family in the US has sufficient income to qualify for a mortgage loan. Moreover, it measures whether a family can afford the monthly housing costs without putting too much strain on the family budget.

They compare the median income of a family (earning the median family income as reported by the U.S. Bureau of the Census) to the income which lenders require of households.

Typically, the qualifying income is at least twice a person’s monthly income – banks calculate buyers’ income for mortgage qualification in various ways, depending on credit score, income during the past two years, location, and others.

For this index, they calculated the qualifying income based on the notion that the monthly housing costs should not be more than 25% of the total income a family earns per month.

The index is shown as a ratio where 1.0 means that families earn just enough to be able to cover the monthly payments associated with purchasing a new home. If the index is higher than 1, then families earn more than they need to pay the mortgage, while if the number is below 1, it indicates that families can’t afford to purchase a new home.

Methodology

They used data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development for the number of homes sold and the median price of new single-family homes. The loans used for the index are 30-year fixed mortgages with a 20% down payment, while the interest rates were taken from Freddie Mac, 30-Year Fixed Rate Mortgage Average in the United States (FRED, Federal Reserve Economic Data).

In order to calculate the monthly payments, they used the Bankrate mortgage calculator. The monthly payments include property tax and home insurance along with the principal and interest. However, both vary significantly within states and counties, which is why they used national average rates.

According to WalletHub and Census Bureau data, the average American pays $2,471 in property taxes each year, amounting to $206 per month. Bankrate data shows that the national average cost of home insurance is $1,383 per year for $250,000 in dwelling coverage, or $115.25 per month.

Lastly, they used data for the median family income from the U.S. Bureau of the Census, but as it does not provide figures for 2022, they calculated the index ratio based on 2021 data.

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Hi! I am a millennial mom with a passion for personal finance. I have always been “into” personal finance but got inspired to start my blog after a period of extended unemployment. That experience really changed the way I viewed my relationship with money and the importance of accessible personal finance education.