Only two of the 50 largest U.S. cities are within reach of first-time homebuyers, according to a new analysis that weighs median list prices against local income.
The report on first-time homebuyer affordability, published this month by personal finance website NerdWallet, invokes an age-old rule: First-time buyers should budget for a home at no more than three times household income.
This rule may seem unrealistic. But two cities, Pittsburgh and Cleveland, have enough affordable housing that average listed prices are less than three times the average household income for younger adults in those cities.
In the fourth quarter of 2022, the median Pittsburgh home was listed for $214,011, which is 2.6 times the area’s median household income for younger buyers, $82,170. The income number covers adults between the ages of 25 and 44, which is the typical age range for first-time homebuyers.
The median Cleveland home is listed at $199,410, which is 2.9 times that city’s median household income for new buyers, $68,897.
Home prices have been dropping, and the number of homes for sale has been going up. This is good news for buyers, who find themselves with much more leverage than they did a year or two ago.
The bad news? Mortgage rates are very high, at least compared to the low interest wealth of the last several years. The average rate for a 30-year fixed mortgage is between 6 and 7 percent. At the start of 2022, rates were close to 3%.
The average sale price of an American home increased by more than fifty between 2020 and 2022, peaking at around $468,000.
NerdWallet launched its affordability analysis in 2020. To date, none of the largest cities have been rated as “affordable,” when comparing selling prices to income.
“On most sites, looking at homes priced at three times your income right now is unrealistic,” Elizabeth Renter, senior writer and data analyst for NerdWallet, writes. “The search results will be almost empty.”
The latest analysis found Los Angeles to be the least expensive big city, with a median home price of $919,230, more than 10 times the city’s median household income among younger buyers, $88,020.
The median home cost in New York — the entire city, not just Manhattan — is $664,386, seven times the buyers’ income of $94,423.
Chicago homes are listed for an average of $329,491, four times the income of the buyers, $83,408.
If you use an affordability multiplier of four instead of three, in the budget for homes that cost up to four times the income of a first-time buyer, many cities start to look marginal.
The median cost of a Philadelphia home is $327,524, less than four times the buyers income of $85,443. Baltimore homes are listed for an average of $335,641, which is 3.6 times the income of the buyers, $92,514.
Nationally, homes were listed at 5.4 times the median income for young adults in the fourth quarter of 2022. The least affordable cities include San Diego, Miami, San Francisco and Las Vegas. More affordable: Buffalo, New York, Detroit, St. Louis, and Indianapolis.
“Our national average shows that it is very realistic for potential first-time homebuyers to be able to find a home for nearly five times their income,” Renter said in an email interview. But California buyers will balk at that number; After all, the state is home to some of the lowest-cost markets.”
Menu prices fell 5 percent nationwide and 3 percent in major cities in the fourth quarter of 2022, after adjusting for inflation. Only eight large cities saw an increase in home prices, and the gains were small.
When the report compares home prices in late 2022 to the market in the previous year, the results vary across the map, showing how different the local real estate market is from another. Between the fourth quarter of 2021 and the same time in 2022, median home prices fell 11 percent in New Orleans, 9 percent in Austin, Texas, 8 percent in Denver, and 6 percent in Houston. But prices have risen sharply in Milwaukee, Memphis and Miami.
During the same time period, the number of homes for sale nationwide increased by 44 percent. In large cities, listings are up 63 percent in that period. Large inventories of unsold homes work to the advantage of potential buyers.
As 2023 home sales data comes in, “we’ll likely see prices lower than they were in 2022,” Renter said. On the other hand, mortgage rates are likely to remain high.
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