A slideshow “The Salary You Must Earn to Buy a Home in 25 Cities,” was one of the most popular pieces published on the HSH.com financial news blog last year – despite the fact that it was released in mid-November.
This follow-up to calculations that first appeared in May 2013 using first-quarter data is especially significant because it demonstrates how “affordability has declined significantly since the beginning of 2013 because both home prices and mortgage rates have trended upward,” according to the author and HSH.com managing editor Tim Manni.
Adding to that, National Association of REALTORS® (NAR) chief economist Lawrence Yun explained that recent declines in both pending and existing-home sales are the result of decreased affordability.
“Affordability has fallen to a five-year low as home-price increases easily outpaced income growth,” he said.
In order to create the original list and then update their findings, HSH.com took NARs' 2013 third-quarter median home prices, as well as its average interest rates for 30-year, fixed-rate mortgages in the quarter, and plugged them into a mortgage calculator to determine the principal and interest payment needed to buy a median-price home with a 20 percent down payment in 25 major metropolitan areas.
“There is no doubt that your income will need to be much higher, possibly even double or triple these levels to cover the needed taxes, insurances and other expenses to live in the home, plus any other debts you might have,” Manni added to the findings. “Because those are highly variable, down to even the individual property level and personal choice, there is no adequate way to factor for them.”
Here are a few highlights of the results, which include the basic, bottom-line income you need to cover just the mortgage in the following cities. As a general rule, a home's purchase price should be anywhere between three to five times annual household income – with the total monthly payment 31 percent of gross monthly income.
Top 5 most affordable:
1. Cleveland - $22,348.03 (home price $127,000/monthly payment $521.45/salary increase of nearly $7,000 from the beginning of 2013)
2. Cincinnati - $25,151.04 (home price $142,100/monthly payment $586.86/salary up about $6,000)
3. St. Louis - $25,277.82 (home price $143,700/monthly payment $588.65/salary up nearly $8,000)
4. Atlanta - $26,862.53 (home price $152,300/monthly payment $626.79/salary up nearly $9,000)
5. Tampa - $26,930.35 (home price $151,800/monthly payment $628.37/salary up about $5,000)
11. Chicago - $37,078.02 (home price $209,000/monthly payment $865.15/first city on the list to see a salary increase of more than $10,000 at nearly $12,000)
Ironically, of the two teams playing in the Super Bowl today, Denver beats Seattle in affordability by well over $10,000 even though they are separated by just one place on the list:
18. Denver - $50,662.05 (home price $286,900/monthly payment $1,182.11/salary up about $10,000)
19. Seattle - $63,145.41 (home price $354,700/monthly payment $1,473.39/salary up nearly $14,000)
Top 5 most expensive:
20. Washington, DC - $68,345.39 (home price $392,500/monthly paytmet $1,594.73/salary up over $14,000)
21. Boston - $68,956.41 (home price $393,7000/monthly payment $1,608.98/salary up nearly $17,000)
22. New York City - $71,254.65 (home price $405,400/monthly payment $1662.61/salary up over $13,500)
23. Los Angeles - $79,176.55 (home price $448,900/monthly payment $1,847.45/salary up almost $25,000)
24. San Diego - $85,842.74 (home price $485,000/monthly payment $2,003.00/salary up nearly $21,000)
25. San Francisco - $125,071.78 (home price $705,000/monthly payment $2,918.34/salary up almost $28,000)
For those of you who are thinking about house hunting in 2014, the reality of this situation is that an uneven economic recovery has boosted home prices as much as than 15 percent in some areas, while median household income has risen just 3 percent (supporting Yun’s statement). At the same time, interest rates are slowly rising from historic lows. They currently hover in the low to mid 4 percent range for a 30-year fixed-rate mortgage.
Even so, many experts are warning that “affordability,” which is defined as a ratio of purchase price to income, may never be lower.
Using the numbers for the Chicago metro area, you could purchase a home priced $209,000 for a monthly payment less than $900 with a salary just over $37,000.
Realistically, you should also factor in taxes and insurance plus operating costs such as utilities, maintenance and repairs (the sum of which was estimated by the National Association of Home Builders/NAHB to be an average 4.24 percent of a home's total value per year, less for newer homes) plus other debts and obligations (the overall "back-end" debt-to-income ratio, defined as mortgage payment plus all recurring monthly debt, divided by gross income, should be less than 43 percent).
So, along with a base monthly mortgage payment of $900, you will need to come up with an estimated $739 to cover other housing related expenses (209,000 x .0424 / 12) in addition to paying other bills, buying necessities like food and clothing, covering medical expenses, treating yourself to a meal out now and then, going on a vacation, saving for the future and so on.
Far more than just plugging numbers into a calculator, “affordability” means different things to different people. When it comes to how much house you can afford, there’s often a big difference between getting approved for a mortgage of a certain amount and actually being able to make those payments every month.
That’s where an experienced Realtor® can help. Along with showing you the type of house you can purchase for a price that suits your budget (as determined based on your preapproval amount), your Realtor can help you weigh a number of factors starting with location since different neighborhoods within the same town or city have a range of prices in order to find the best possible options within your price range.