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When it comes to buying a home, affordability continues to improve gradually.
According to a new report from Zillow, an American household with the median income (estimated at $86,300) and enough money for a 20% down payment can now buy a home for $331,483, up $30,302 from $301,181 a year ago. Zillow’s “affordable” means your monthly mortgage payment, including insurance and property taxes, is less than 30% of your household income.
“An additional $30,000 in purchasing power could allow you to build a home in a different neighborhood, a larger home, or with fewer compromises,” the report states.
This improvement is due, at least in part, to the slow decline in interest rates. The average interest rate on a 30-year fixed mortgage was 5.99% as of Feb. 27, but has since risen to 6.14%, according to Mortgage News Daily. A year ago, it was 6.79%.
Kara Ng, senior economist at Zillow and author of the report, said that for mortgages, even 0.5 percentage point lower interest rates can make a difference.
“As a rough estimate, a half-point drop in mortgage rates could save a typical U.S. home about $1,000 a year,” Ng said.
According to the National Association of Realtors, a 1 percentage point drop in interest rates could expand the number of households that can afford to buy a home by about 5.5 million households, including about 1.6 million renters who may become first-time home buyers. NAR said it estimated the income needed to buy a median-priced home based on a 30-year mortgage, a 10% down payment and a mortgage payment of 25% of income, using a 7% mortgage rate and a 6% interest rate.
Median-priced housing remains unaffordable
However, affordability remains challenging. Although the amount a median-income household can afford is higher than a year ago, that number remains below the median price of a single-family home, which was $400,300 in January, according to NAR.
Based on that price and January’s average mortgage rate of 6.19%, a buyer would need an income of $94,032 to qualify for a mortgage, according to NAR’s Affordability Index. This measurement also assumes the buyer has a 20% down payment. In this case, your down payment would be $80,060. And, of course, lenders consider more than just your income when deciding whether to approve a loan, they also consider factors such as your credit score, credit history, and outstanding debts.
The amount of income has decreased compared to the previous year. According to NAR’s Affordability Index, if the average interest rate was 7.04% and the median home price was $398,100, a buyer would need to have an income of $102,096 to qualify.
Meanwhile, housing prices are rising faster than household income. According to a recent study by the Federal Reserve Bank of St. Louis, from 2000 to 2024, median per capita income increased by about 155% and median home prices increased by about 207%. Additionally, mortgage interest rates rose from less than 3% in mid-2021 to nearly 8% in October 2023.
“Buyers are still feeling the impact of sharp price increases during the pandemic and mortgage rates that are still much higher than at the beginning of this decade,” Ng said.
Prices may rise as more buyers enter the market
Improved inventory is also contributing to affordability, with homes on the market up 6% in January compared to the same month last year, Zillow reports. However, widespread housing shortages remain a problem.
Increased affordability also means more potential buyers this spring.
“Unless housing supply increases, home prices may simply increase as these additional potential buyers become more active in the market,” Lawrence Yun, NAR’s chief economist, said in a January release regarding pending home sales and increased affordability.
