The income you need to comfortably afford mid-priced housing in America

According to recent data from the Federal Reserve Bank of St. Louis, the average sales price of homes sold in the United States reached $412,000. The significant increase in prices over the past several years marks an all-time high in the nation’s housing market, driven by factors such as persistently low inventory, increased demand and changing post-pandemic economic conditions.

While the growth rate has has begun to decline over the past year or so, rising prices are reshaping the home ownership landscape, presenting challenges for first-time buyers and influencing housing policies nationwide (like Kamala Harris’ proposal to help those who buys a house for the first time).

So if you happen to be one of these potential home buyers, let’s take a look at the numbers to really understand what it would take to buy a home in today’s market, without overextending the total budget.

Don’t be homesick

When considering buying a home, it’s important to assess how much of your income will be devoted to housing expenses. Many personal finance experts and financial advisors suggest spending no more than 28% of your gross monthly income on housing costs, including mortgage payments, property taxes and insurance.

This helps ensure you have enough funds left over for other obligations such as debt repayment, savings and discretionary spending. However, we found that even at 28%, people tend to underestimate the costs that can come up unexpectedly when it comes to owning a home (leaky roof, anyone?). Therefore, here at 24/7 Wall St., we like to suggest a more conservative 22% cap on housing expenses.

By keeping housing costs at or below this lower threshold, you create a larger financial cushion to deal with unexpected expenses, invest more in savings or retirement accounts, and avoid the pitfalls of becoming “house poor.” Getting too much of a budget in your home can leave you financially vulnerable, with limited flexibility to handle emergencies or take advantage of other opportunities (what if you land a new, dream job that requires a down payment salary?).

Therefore, keeping a modest portion of your income for housing not only protects your financial health, but also improves your overall quality of life.

As much as you need

Now that we understand the logic behind the 22% threshold. Let’s run the numbers.

A potential buyer needs to earn approx $135,000 annually to comfortably afford a $412,000 home with a 20% down payment, assuming a 6% interest rate on a 30-year mortgage.

Here’s how the numbers break down…

After a 20% down payment of $82,400, the loan amount becomes $329,600. With a 30-year mortgage at a fixed rate of 6%, your monthly mortgage payment would be about $1,977. Adding estimated monthly property taxes of about $412 (based on an annual property tax rate of 1.2%) and homeowner’s insurance of about $100, the total monthly cost of housing comes to about $2,489.

To keep this within 22% of your gross monthly income, you would need to earn about $11,313 per month.

Rates matter!

While $135,000 might seem daunting to some, there are other factors at play. If house prices stabilize and interest rates fall, you can see in the table below that it can change the calculation significantly.

Stay positive

Despite the challenges in today’s real estate market, there is hope for aspiring homeowners.

By working with a knowledgeable real estate agent and trusted financial advisor, you can more effectively navigate the complexities of buying a home. These professionals can help you explore various financing options, identify properties that fit your budget, and develop a customized plan to achieve your home ownership goals. With the right guidance and support, making the dream of owning a home a reality is within your reach.

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