The Income Needed to Buy a Typical Home Has Soared 80% Since 2020

The income needed to afford a typical home has increased by a staggering 80% in the past four years, highlighting just how much current home prices and mortgage rates are straining buyers' budgets.

Last month, homebuyers needed to make about $106,500 to afford the monthly mortgage payments for a typical home. That’s up from about $59,000 in January 2020, according to a new report from Zillow.

Four years ago, most households could comfortably cover the monthly payments on a typical home because the median income was about $66,000.

Incomes are much higher today, with the typical household bringing in about $81,000, according to Zillow’s estimates. However, that roughly 23% increase in median income isn't nearly enough to offset the $47,000 spike in what it takes to afford the typical home.

The report’s calculation of the income needed to afford a home is based on the assumption you shouldn’t spend more than 30% of your income on your total monthly payments, which include home insurance, property taxes and maintenance.

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Why homes are so much less affordable

With a 10% down payment, Zillow reports that the typical monthly mortgage payment was $2,188 in January, which is nearly double (up 96.4%) what it was four years ago.

Much of that increase is due to the pandemic boom in home values, which are 42.4% higher than the January 2020 level. The other major element is mortgage rates: The current average rate on a 30-year fixed-rate loan is 6.9%, according to Freddie Mac. In January 2020, rates were around 3.5%.

To cope with higher monthly payments, today’s homebuyers are relying on several strategies including renting out parts of their homes, moving to cheaper cities and even “cobuying” houses with friends, according to Zillow.

Home prices could continue to rise in 2024, further challenging affordability. A new Fannie Mae report forecasts a 3.8% increase in home prices this year, which is higher than the expectation last month of a 2.4% increase.

"As the dearth of listings boosts both prevailing values and expected future prices, the affordability concerns of prospective homebuyers are unlikely to fade soon," Terry Loebs, founder of research firm Pulsenomics, said in the report.

The one piece of good news is that Fannie Mae's panel of experts forecasts mortgage rates will fall to 6% by the end of the year.

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