Income needed to buy a home falls for first time since 2020: Report

The annual income buyers need to afford a house fell for the first time since 2020, driven by the first annual decline in mortgage rates in three years.

Homebuyers need to earn $115,454 per year to afford a typical home, down 1.4 percent from a year ago, according to a new report by the real estate company Redfin.

That’s the first year-over-year decline since June 2020, when mortgage rates fell to a new record low after the Federal Reserve slashed interest rates to near zero as the pandemic ravaged the economy.

But in the wake of the pandemic, high inflation pushed the Fed to drastically raise interest rates to their highest level in more than two decades, which yanked up mortgage rates as well.

Mortgage rates have been coming down, especially since the central bank kicked off its rate cutting cycle last week with a 50 basis point cut, bringing interest rates to a range of 4.75 percent to 5 percent.

The average interest rate on a 30-year mortgage now sits at 6.09 percent, according to Redfin. The average rate was 6.5 percent in August, down from 7.07 percent a year earlier.

But Redfin senior economist Elijah de la Campa warned against house hunters waiting for mortgage rates to fall further.

“[T]he Fed’s latest interest rate cut and its plans for future cuts were highly anticipated, meaning they’re already mostly priced into mortgage rates. When the Fed cuts short-term interest rates, long-term rates like mortgage rates don’t always move down nearly as much,” de la Campa said.

“Housing affordability is improving for the first time in four years, so if you want to buy a home and can afford to, now could be a good time because it’s unlikely to become markedly cheaper in the near future.”

Inflation has also remained sticky in the housing sector, with shelter prices driving headline price increases from July to August, according to the Labor Department.

Shelter costs were up 5.2 percent in August from a year earlier, even as headline inflation fell to 2.5 percent.

So even though the income needed to afford a home has fallen, homeownership remains out of reach for many Americans.

Redfin defined a home or listing as “affordable” if, after a 15 percent down payment, monthly payments do not exceed 30 percent of monthly earnings. The median household only earns $84,000, 27 percent less than is needed to afford a median priced home in the U.S. at $433,101, according to Redfin.