How Much Does Homeownership Cost in the U.S.?
Owning a home is a crucial part of the American Dream for millions of people. Unfortunately, with rising prices and soaring mortgage rates, that dream is becoming even more difficult. It’s been said that location is the most important aspect of selling a home, which means that the cost of owning a home largely depends on where you’re planning to buy. Learn more about how much it costs to own a home based on the market that you’re looking into.
The cost of homeownership has never been higher in the United States. Thanks to a widespread inventory shortage, soaring interest rates, and numerous factors that have impacted the cost of new constructions, the housing market is in disarray. While industry experts do expect things to return to a state of normalcy again, it’s impossible to determine exactly when that will be. That uncertainty, combined with the Federal Reserve’s decision not to lower interest rates in 2024, has many potential buyers wondering if they should make a purchase. Every real estate transaction is unique, but that doesn’t mean that there aren’t some universal truths.
You’ve probably heard it said that in real estate, nothing matters more than location. That’s certainly true, and it’s evident when you look at the different costs of homes based on their locations. If you’re considering purchasing a home but are worried about finding something you can afford, be sure to consider the cost of homeownership across the United States. The American Dream involves homeownership for millions of people, and location is paramount.
How Much Do You Need to Make Per Year?
According to studies, Americans need to earn approximately $106,500 per year to be able to afford a typical home in the United States. That number becomes even more staggering when you realize how much it’s increased in the last four years. In 2020, it was reported that Americans had to make only $59,000 per year to be able to afford the same home, an increase of more than $47,000.
When considering affordability, most experts consider a home affordable if it costs roughly 30% of the owner’s pre-tax income. This 30% doesn’t only include monthly principal mortgage payments, but also interest, insurance, taxes, maintenance, and more. When shopping for a home, it’s important to remember the “hidden costs” of homeownership which extend beyond the monthly mortgage payment.
In 2020, the median income in the United States was around $66,000, which meant that homeownership was incredibly realistic for millions of people. When you combine that with the fact that the Federal Reserve lowered interest rates in the face of the COVID-19 pandemic, there was a surge in home buying.
The increase in the required income to purchase a home (80%) far exceeds the median household income which has only increased by 23% to $81,000 in that same time. Wages simply aren’t growing at the same rate that home prices are, precluding millions of potential buyers from the market.
Location, Location, Location
One of the most interesting impacts that the pandemic had on the real estate market involved the surge of purchases in “secondary cities.” In real estate, cities are considered primary, secondary, and tertiary based on their population. For instance, cities like New York, Chicago, and Los Angeles are primary while cities like Charlotte, Nashville, and Austin are secondary. When remote work surged in popularity, many people left primary cities and purchased homes in secondary or tertiary markets. Primary markets are still the most expensive in the country, but secondary and tertiary markets have also seen an increase in price.
The real estate industry typically relies more on the median price than the average price when determining what’s “normal” in an area. With that in mind, Redfin compiled the Median price of homes in all 50 states and the District of Columbia at the end of 2023:
Alabama: $267,100 Alaska: $350,000 Arizona: $435,300 Arkansas: $246,000 California: $793,600 Colorado: $586,100 Connecticut: $424,900 Delaware: $375,000 District of Columbia: $640,000 Florida: $405,000 Georgia: $389,500 Hawaii: $714,100 Idaho: $539,000 Illinois: $266,800 Indiana: $242,500 Iowa: $289,900 Kansas: $263,700 Kentucky: $246,700 Louisiana: $243,300 Maine: $370,000 Maryland: $395,000 Massachusetts: $595,700 Michigan: $238,800 Minnesota: $330,500 Mississippi: $232,800 Missouri: $243,500 Montana: $609,900 Nebraska: $280,400 Nevada: $479,299 New Hampshire: $451,400 New Jersey: $485,900 New Mexico: $358,600 New York: $649,000 North Carolina: $362,200 North Dakota: $334,075 Ohio: $228,000 Oklahoma: $233,900 Oregon: $490,200 Pennsylvania: $268,100 Rhode Island: $455,500 South Carolina: $360,800 South Dakota: $300,200 Tennessee: $418,900 Texas: $336,400 Utah: $548,900 Vermont: $395,800 Virginia: $415,600 Washington: $605,400 West Virginia: $284,000 Wisconsin: $329,000 Wyoming: $317,000
In May 2023, Home Sweet Home published a report that focused on the annual income that someone needs in order to purchase a home in the largest U.S. cities. The ten most expensive cities are as follows:
San Jose, CA: $373,696 San Francisco, CA: $282,167 San Diego, CA: $209,110 Los Angeles, CA: $181,106 Seattle, WA: $170, 340 Boston, MA: $165,239 New York, NY: $160,233 Denver, CO: $150,622 Washington, D.C.: $139,911 Miami, FL: $137,575
The U.S. Census Bureau reports that more than 54% of Americans make less than $50,000 per year, which makes homeownership in some of the biggest cities in the nation unrealistic for more than half of American citizens. 82% of Americans make less than $100,000, which puts them well below the minimum threshold for homeownership in any of those 10 cities.
What Are My Options?
If you’re one of the people who simply doesn’t make enough to reasonably afford a home in one of those major cities, you’re probably wondering what you’re supposed to do. The first and perhaps most obvious answer is to simply avoid shopping in those markets. Mortgage lenders carefully examine your income, financial history, and more before approving you for a mortgage, so applicants who make less than $50,000 aren’t going to get approved for a $373,000 mortgage in San Jose, California. However, it’s still important to try to avoid spending the full amount that you’re approved for. If you’re fortunate enough to get approved for a $373,000 mortgage loan, experts agree that you shouldn’t buy a home that costs that much. Remember, you don’t have to take out the full amount.
If you prefer city living, you may feel like all hope is lost. That’s not the case at all. Places like Pittsburgh, Pennsylvania, Cleveland, Ohio, and Louisville, Kentucky all require median incomes below $65,000 in order to purchase a home. If you’re willing to compromise on the city that you move to, you can find a home in a city at a price that works for you.
There are also steps you can take to lower your monthly payment by coming up with a higher down payment. On the surface, that seems like a daunting task, as some lenders require a 20% down payment depending on the type of mortgage that you’re applying for. However, if you pick up a side hustle and start accruing cash, you can lower your monthly mortgage payments by putting more money down.
Finally, Zillow reports that some young homeowners are taking part in an unusual activity known as “house hacking.” House hacking occurs when people who own a home rent out a room to someone who is looking for a place to live. In some cities, where the rental market is hot enough, homeowners can rent a single room and bathroom for enough to cover their mortgage.
There’s no denying that the housing market is in an undesirable place. If you’re looking to purchase a home, it’s important that you do your research and carefully evaluate your own financial situation. Once you’ve done those things, consider your personal financial goals and make the best decision for your future.