The dream of homeownership is becoming increasingly elusive for the average American, even those earning a six-figure income. The spring 2023 housing market is being dubbed "a nobody's market," as sellers cling to their homes to maintain low interest rates while many buyers find themselves priced out.
On May 4, the federal funds rate, which influences mortgage rates, rose above 5% for the first time since 2007. It is estimated that homebuyers now need to allocate approximately 25% of their income to housing costs, a 1% increase from 2022. To see significant numbers of buyers re-entering the market, affordability conditions would need to improve drastically, likely through a combination of lower home prices and falling mortgage rates.
While waiting for the market conditions to shift is an option, there are alternative ways to invest in real estate without requiring an above-average salary.
Breaking Down the Numbers It has been calculated that, to afford a $500,000 home, an individual would need to earn over $140,000 a year. This figure is based on a 10% down payment of $50,000, a 30-year fixed-rate mortgage at 6.32%, and a tax and insurance rate of 1.72%. With these factors considered, the monthly payment would amount to $3,508. As most lenders require housing expenses to be at or below 30% of gross income, an annual salary of $140,312 would be necessary to meet this criterion.
A $500,000 home may seem extravagant, but it is important to note that the median national home price for active listings reached $430,000 in April. Using the same calculation method, a home in this price range would require a yearly income of around $118,760 to afford monthly housing costs of $2,969. This figure is significantly higher than the national average salary of $68,623.
For those looking to enter the real estate market:
Save a Large Down Payment
A considerable down payment is often the primary obstacle to homeownership. A larger down payment reduces monthly mortgage payments and protects against additional costs, such as private mortgage insurance (PMI), which lenders typically require for down payments less than 20% of the purchase price.
However, accumulating a sizeable down payment is easier said than done. A 20% down payment on a $500,000 home equates to $100,000 in cash, a sum that few people have readily available. Using a savings goal calculator can help create a roadmap to achieve financial goals and break down targets into smaller, achievable milestones. Automating savings through direct deposit or recurring transfers to a savings account can also help maintain discipline when budgeting and managing money. Betterment is a low-cost automated savings system that can easily be set up in an hour and will get you on your way to saving that down payment.
Obtain the Best Loan Possible
Without an exceptionally high salary or a significant financial windfall, purchasing a house without a loan is unlikely. There are several types of mortgages available for homebuyers and those looking to refinance their current mortgage loan. Government-backed loans, such as FHA, USDA, and VA loans, cater to low- to moderate-income Americans, rural residents, and veterans. Other loans may only be available to borrowers with a certain income level and a solid credit score.
Improving your credit score by paying bills on time, maintaining low credit utilization, and checking your credit report for errors can open up better loan options. A higher credit score can qualify you for a lower interest rate on your mortgage, potentially saving thousands of dollars in interest over the life of your loan. Regardless of the type of loan you qualify for, it's recommended to compare at least three different offers before making a decision.