One of the most exciting and expensive duties you’ll ever take on is becoming a homeowner. Additionally, in a high-interest climate, potential homeowners are paying much more than in the past for their homes.
Housing affordability in December 2022 was worse than it had ever been in the years leading up to the housing bubble in 2008, according to the Atlanta Fed. The average cost of a home sold in the United States as of the fourth quarter of 2022 was $535,800.
For most Americans, a home costing over $500,000 is a significant amount of money. However, how much does that amount translate into in terms of monthly mortgage payments, and how can you tell if you can genuinely afford a home at that price?
How much income to afford a $500,000 home?
According to Realtor.com economic data analyst Hannah Jones, an individual would normally need to earn around $140,000 annually to afford a $500,000 home.
With taxes and insurance, the monthly principle and interest payment would be $3,508, or $2,791 without them. A person would need to earn $140,312 to ensure that only 30% of income is going toward that sum, according to Jones’ calculations.
How much income to afford a $1 million home?
A person would need to earn at least $281,000 annually to afford a $1 million home in a major city like New York City or San Francisco, according to Jones.
With taxes and insurance added, the monthly principal and interest payment would come to $5,582; the total would be $7,015. A person would need to earn $280,625 to ensure that only 30% of income is going toward that sum, according to Jones.
Remember that $1 million homes are becoming less prevalent as properties lose value when the housing market cools, Redfin advised in a note published in March.
How much income to afford a median-priced home?
According to the National Association of Realtors, a person would need to make $101,000 in order to afford an existing property, which has a median price of $363,000.
$2,026 would be paid in principal and interest each month, and $2,547 would be paid in total each month, including taxes and insurance. A person would need to earn $101,867 to ensure that only 30% of revenue goes toward that sum.
Given that there is now a limited supply of existing homes, many purchasers may be thinking about purchasing a new home.
The building industry’s percentage of all sales has increased significantly since the Great Recession, according to Rick Palacios Jr., director of studies and managing principal at John Burns Analysis and Consulting, who provided more information on this topic last month.
According to the Census Bureau, a new home costs $438,200, so a person would need to make close to $123,000 in order to afford one, according to Jones.
With taxes and insurance, the monthly principle and interest payment would be $3,074, or $2,446 without them. A person would need to earn $122,970 if only 30% of income was going toward that sum, according to Jones.
To afford a home, the typical home buyer must make more money than the median salary. Even if the property market has slowed down, many individuals still cannot afford homes.
Jones claims that for each of these price tiers, “the minimum income required to maintain affordability recommendations is well above the national median.”
According to the most recent data from the Census Bureau, the real median household income in the United States was $70,784 as of 2021.
“High housing prices and high mortgage rates continue to be barriers for would-be homeowners. Despite a slowdown in home price increase, Jones pointed out that the national median listing price in March 2023 was approximately 33% higher than it had been three years earlier.
The takeaway
There isn’t a set formula that will tell you with certainty how much you can spend on a property. The purchase price of your home will vary from month to month depending on a number of variables, including mortgage interest rates, local average property prices, your debt load, credit score, and more. These variables will also determine whether or not the price is within your budget.
Consider visiting with a mortgage professional who can analyze your income and financial situation to help you decide how much you can comfortably pay if you’re unsure of where to start or how to make a budget for your house purchase.
