A Nation of Lifelong Renters?

Key Takeaways:

• Even as conditions improve, home ownership remains out of reach for many U.S. households. 
• You must earn $98,100 annually to commit no more than 30% of your income to the median-priced home nationally. 
• In more expensive markets, the amount you need to make is exponentially higher. 

Nearly 25% of millennials who rent say they’ll continue to do so forever. 

Even more telling is the main reason: 77% of millennials say they just can’t afford a home. That’s way up from 2018, when 68.9% of 26- to 41-year-olds cited finances as their prime obstacle to home ownership. 

Consider a hypothetical U.S. household earning $80,000 a year, or $6,667 a month. This haul puts you comfortably higher than the Q3 median salary of $55,640, which we generated using the above-mentioned $1,070 weekly median earnings of full-time salary and wage workers. 

Using that November 2022 median list price of $415,750, a 20% down payment sets you back $83,150. More than our example household earns in a year.

But we’ll set this potential obstacle aside and lower the down payment to 5%, which equals $20,788 down on a $415,750 home. 

Two problems with this: 

• One, the lower down payment results in a higher monthly payment, which might make it harder for some people to qualify for loans due to the important debt-to-income ratio lenders scrutinize. 
• Two, $415,750 represents the national median. In big and hot real estate markets, medians come in much higher. For example, it’s just shy of $1 million in Los Angeles and $625,000 in Austin as of October, making the down payment harder to come up with and probably scarier to part with. 

Plus, would you be happy with the standard median-priced home where you want to live?

But we’ll set that last point aside too. 

If you put 5% down on a $415,750 home, you’ll need to take out a $394,962 mortgage. 

With the 30-year interest rate of 6.34%, you’d be on the hook for a $2,455 monthly payment. That’s 41.9%, or $725, higher than the $1,730 a month you’d pay on the same size loan at the 3.3% interest rate we started 2022 with. 

So our above-the-median household bringing in $6,667 a month would have to commit 36.8% of its income to its mortgage alone. This doesn’t pass the affordability gauge of spending no more than 30% of your income on housing, nor does it include additional costs such as property tax and insurance. 

If we up the cost of the home in this exercise to a more realistic $650,000, the math gets even scarier. 

With 5% down ($32,500), the subsequent $617,500 mortgage loan (before taxes and insurance) results in a $3,838 monthly payment, which eats up 57.6% of that $6,667 monthly salary. 

Simply put, our hypothetical would-be homeowner remains a wannabe homeowner because they’re not getting approved for that loan. 

Even if prices come down, the numbers don’t look much better. 

Moody’s predicts a 10% decline in home prices across the board without a recession. In Austin, it predicts a 16.3% drop, which would take the median price there to roughly $525,000. 

Using a 5% down payment ($26,250) and 6.34% interest, the $498,750 loan results in a monthly payment of $3,100, or 46.5% of a $6,667 monthly salary. 

To bring that number to just 30% of income: 

• Interest rates would have to plummet to 2.6%, or
• In our Austin example, housing prices would have to crash 34.8% on top of the predicted 16.3%, or
• You’d need to earn nearly $124,000 a year, or $10,333 a month. 

Of course, interest rates and housing prices could work in tandem to make housing in Austin more affordable, but you get the point. 

The Bottom Line: Home ownership in America changed in the blink of an eye. The game is entirely from what it was at the beginning of 2022. And it’ll take an equally as dramatic shift to bring more renters off of the sidelines. 

Even if you can technically afford a home at the 30% threshold, things still might be tight. A recipe for potential personal financial stress.

While a relatively modest correction in housing prices will turn some renters into homeowners, only a crash in prices, interest rates, or both will make home ownership affordable for the average or even above-average American household. 

And don’t forget that in our calculations, we went low on the down payment; didn’t include taxes, insurance, and other costs of homeownership; and assumed homebuyers would be happy with what they can get at or around the median across the country. As we told you last month, the median is much less home than it used to be.

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