Salary you must earn to buy a home in the 50 largest metros

How much salary do you need to earn in order to afford the principal, interest, tax and insurance payments on a median-priced home in your metro area?

For our calculations, HSH.com uses the National Association of Realtors’ 2017 third-quarter data for median-home prices, national mortgage rate data derived from weekly surveys by Freddie Mac and the Mortgage Bankers Association of America for 30-year, fixed rate mortgages and available property tax and homeowners insurance costs to determine the annual salary it takes to afford the base cost of owning a home (principal, interest, property tax and homeowner’s insurance, or PITI) in the nation’s 50 largest metropolitan areas.

We used standard 28 percent “front-end” debt ratios and a 20 percent down payment subtracted from the NAR’s median-home-price data to arrive at our figures. We’ve incorporated available information on property taxes and homeowner’s insurance costs to more accurately reflect the income needed in a given market.

Third-quarter analysis

The housing market continues to suffer from a combination of limited inventory and rising prices. Amid still-modest income gains, the combination continues to retard sales growth, and there are few signs that the situation will get better quickly or soon. As well, with potential changes afoot for tax deductions for both mortgage interest and capital gains on the sale of a home some housing markets could face additional challenges, too.

In the release that accompanied the quarterly report on metropolitan area home prices, NAR Chief Economist Lawrence Yun didn’t find much to be optimistic about, noting “Unfortunately, the pace of new listings were unable to replace what was quickly sold. Home shoppers had little to choose from, and many had out outbid others in order to close on a home. The end result was a slow down in sales from earlier in the year, steadfast price growth and weakening affordability conditions.”

Yun also added that “While there was some moderation in price appreciation last quarter, home prices still far exceed incomes in several parts of the country…”

A lack of affordable housing isn’t without impact on the economy. “Affordability pressures are frustratingly occurring in places where jobs are plentiful and incomes are rising,” Yun said. “Without a significant boost in new and existing inventory to alleviate price growth, job creation could slow in high-cost areas in upcoming years if residents begin exiling to more affordable parts of the country,” Yun said.

Existing home sales remain steady but without much traction. The annualized pace for sales in the third quarter of 2017 was 5.39 million, but a shade higher than last year’s 5.38 million. Sales began this year with a relatively upbeat pace of 5.26 million in the first quarter but have since decelerated.

Key takeaways

Amid tight markets with little new supply, housing affordability continues to be a spreading problem. This remains the case even though the median price of homes sold in the third quarter of 2017 compared against the second quarter was actually lower in 29 of the 50 markets we reviewed. Lower quarter-to-quarter costs were most pronounced in the Virginia Beach (-6.63 percent), Nashville (-5.71 percent) and San Francisco metropolitan areas (-5.26 percent), reflecting increased sales of lower cost homes in those markets during the period relative to the second quarter.

While a majority of markets were less expensive on a quarter-to-quarter basis, that is simply not the case when we review median costs in the third quarter of this year versus the third quarter of 2016, where a year-over-year decline was seen in just one metro area, Hartford. Even then, the dip was a slight, -1.04 percent.

All other markets saw year-over-year price increase, some rather considerable.

The most expensive market in our group got even more so, as the San Jose metro area posted a 16.5 percent annual rise in the median price, followed closely by the Seattle (+13.36 percent) and Los Angeles (+10.06 percent). In fact, 34 of the 50 markets saw annual gains of over 5 percent.

As you likely know from your own income, overall wage gains continue to be muted, rising at about a 2.5 percent annual rate, so the ability of a potential homebuyer to keep up is increasingly difficult, if not impossible. Just to keep pace with rising prices, year-over-year income gains needed to be in excess of 10 percent in about one third of all metros (plus more than 9 percent in another nine).

In fact, even in Hartford (where prices managed to ease) the influence of taxes and insurances means the income needed to buy even that lower-priced median home was still some 3.56 percent higher this year than last.

Somewhat lower mortgage rates during the period helped to improve affordability, but we may not be able to count on this offset much as we move into the fourth quarter of 2017 and beyond.