The dream of owning a home in the United States has become increasingly difficult for many Americans, as a new report from Oxford Economics indicates that buying a new home now demands a six-figure income in most U.S. cities. This affordability challenge has evolved drastically in the last five years, placing homeownership out of reach for a large portion of the population. According to the report, in the third quarter of this year, a household needed an income of $107,700 to afford a new single-family home. This figure is nearly double the $56,800 income required to buy a similar home in 2019.
This change highlights how rapidly home affordability has deteriorated in just a few years. Today, only 36% of U.S. households earn enough to afford a new home, compared to 59% of households who met this benchmark just five years ago. As affordability continues to erode, buying a home remains a challenge for many Americans, reshaping the demographic and economic landscape of cities across the country.
Pandemic-Era Shifts and the Demand for Larger Homes
The housing market has been reshaped in part due to trends spurred by the COVID-19 pandemic. When the pandemic struck in 2020, it disrupted the economy, the housing sector included. With remote work becoming the norm, many Americans moved out of city centers, seeking more space and even relocating to entirely different regions. This demand for larger living spaces in areas previously considered secondary housing markets drove up housing prices across the country.
The national housing shortage, combined with increased demand, created intense competition, with buyers often competing in bidding wars for the limited number of homes on the market. These factors led to skyrocketing home prices in cities across America, a trend that has proven persistent even as the economy has shifted into post-pandemic recovery.
A Tale of Two Markets: High-Cost Cities vs. Affordable Midwest Locations
While home prices have risen across nearly every U.S. city, affordability varies drastically by region. California dominates the list of least affordable cities, with San Jose ranking as the most challenging metro area for prospective homeowners. The median home price in San Jose reached a staggering $1.89 million in the third quarter of 2024, which requires an annual income of about $461,000 to be considered affordable. Other California cities like San Francisco, Los Angeles, and San Diego rank similarly as some of the least affordable metro areas in the U.S.
On the other hand, several cities in the Midwest offer relatively affordable options for homebuyers. Cities like Cleveland, Louisville, Detroit, and St. Louis are among the most accessible housing markets, with annual incomes needed to cover housing costs ranging between $64,600 and $75,300. These figures highlight the significant geographic disparities in affordability, with buyers in some regions facing far fewer financial hurdles to homeownership than those in high-demand, high-cost metro areas.
How Affordability Is Defined: Oxford Economics’ 28% Income Threshold
To gauge home affordability, Oxford Economics evaluates whether monthly housing costs exceed 28% of a person’s income. This metric includes principal and interest payments on a mortgage, property taxes, and insurance. When a home’s monthly costs surpass 28% of a household’s income, it is considered unaffordable, indicating that homebuyers would need to devote a disproportionately large share of their earnings to maintain homeownership.
This 28% affordability threshold is widely accepted by economists and financial planners, as it balances the desire for homeownership with the need to avoid excessive financial strain on buyers. The Oxford Economics analysis uses this metric to provide a comprehensive understanding of affordability trends nationwide, highlighting the steep income requirements that buyers face in many U.S. housing markets.
Steepest Drops in Affordability in Sun Belt Cities Popular with Retirees
While California cities lead in unaffordability due to their high property values, the report identifies significant declines in affordability in certain Sun Belt cities. Cities in Florida, Arizona, and South Carolina, which have experienced an influx of retirees and other migrants, saw some of the steepest drops in home affordability over the last five years. These states are popular destinations for retirees seeking warmer climates and a lower cost of living, but the influx of new residents has driven up demand, contributing to rising home prices and making it harder for many households to afford property.
Florida, in particular, has seen rapid population growth, especially among seniors, which has intensified the demand for housing in cities like Tampa and Orlando. With prices rising and incomes in these areas not keeping pace, affordability has become a significant concern. As a result, many local residents are struggling to enter the housing market, and some have been priced out of their own neighborhoods by the influx of newcomers.
Rising Mortgage Rates Worsen the Affordability Crisis
The affordability issue is not solely due to rising home prices; mortgage rates also play a significant role. The report identifies rising mortgage rates as one of the primary drivers of the home affordability crisis. In recent years, mortgage rates have surged, adding considerable costs to home purchases. Mortgage rates nearly doubled from 3.7% in Q3 2019 to a peak of 7.3% in Q4 2023, greatly increasing monthly payments for many homeowners.
Barbara Denham, a senior economist at Oxford Economics, emphasized the impact of rising mortgage rates on affordability: “While house prices increased in every metro, the rise in mortgage rates eroded affordability more significantly.” High mortgage rates mean that even if home prices stabilize, the cost of financing a home remains steep, particularly in regions where property values are already high.
The Federal Reserve’s Role and the Surge in Mortgage Rates
The increase in mortgage rates can be traced back to the Federal Reserve’s actions in response to inflation. In an attempt to control soaring inflation rates, the Federal Reserve implemented a series of interest rate hikes starting in 2022. This led to an upward trend in mortgage rates, making home loans more expensive and reducing the buying power of prospective homeowners.
Although mortgage rates have decreased slightly from their peak, they remain high compared to historical averages. Last week, the average rate for a standard 30-year fixed mortgage was 6.79%, still well above levels seen between 2008 and 2022. Higher mortgage rates mean that even those who could afford a home under previous rates are now finding monthly payments too burdensome, as interest costs account for a larger share of their budgets.
The Future of Homeownership in an Uncertain Market
As the affordability crisis deepens, the outlook for homeownership in the U.S. remains uncertain. Home prices have yet to drop significantly, and mortgage rates are unlikely to return to pre-pandemic lows anytime soon. With many Americans unable to afford a home, experts suggest that the housing market may need a structural shift to meet demand sustainably.
Potential solutions to address the affordability crisis include expanding housing inventory, particularly in high-demand areas, as well as offering targeted assistance to first-time homebuyers. Policies aimed at increasing the supply of affordable housing units, improving financing options, and stabilizing mortgage rates could help alleviate some of the current pressures on the housing market. However, until meaningful changes are implemented, many prospective buyers may continue to find themselves priced out of the market.
In the meantime, buyers are advised to carefully evaluate their financial readiness and consider areas with more favorable affordability metrics, such as the Midwest, where housing costs are comparatively lower. For many Americans, homeownership remains an aspiration, but without further intervention, achieving this goal will remain challenging in high-cost cities, as housing affordability continues to be an ongoing concern across the country.
