Franklin Schneider, Wealth of Geeks
It’s not just your imagination. Housing prices really are getting more expensive — to the tune of 423% higher since 1985.
Home values have climbed steadily across the United States over the years as demand for housing has outstripped the supply of homes and the finite amount of usable land on which to build.
This steady appreciation is what has made homeownership part of the American dream. What has changed is the average American’s ability to purchase homes that are becoming more expensive.
From 1985 to 2022 — the last full year for which housing and income data are available — home values grew 1.9 times faster than income. During that time, the median U.S. home price increased 423%, while the median household income increased just 216%, according to a new study from Home Bay.
Worse yet, the disconnect between home prices and income seems to be accelerating. Since 2000, home prices have skyrocketed 162% — from $165,300 to $433,100. In the same time frame, income increased a relatively meager 78% — from $41,990 to $74,580.
If home prices had increased at the same rate as wages since 1985, today’s median home price would cost $294,000 — about 32% less than the actual price of $433,100.
Crunching these numbers shows that home prices have grown 2.1 times faster than income since 2000, which helps explain the affordability crisis in the U.S. housing market and has worrying implications for the future.
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Why millennials can’t afford homes
Although sharply rising interest rates have slightly cooled the housing market, affordability remains a serious challenge.
One widely accepted measure of affordability is the home-price-to-income ratio, which is calculated by dividing the median home price by the median household income. Financial experts recommend a 2.6 or less home-price-to-income ratio, which means the average home should cost 2.6 times the median annual salary at most.
According to the survey, the median U.S. home costs just over $433,000, while the median household income is $74,580, which translates to a home-price-to-income ratio of 5.8. That’s more than double the level deemed affordable.
Tracking the home-price-to-income ratio over time shows how buying a home has become more difficult for each successive generation.
In 1985, when many boomers bought homes, the home-price-to-income ratio was 3.5. By 2000, when Generation X entered the housing market, it had inched up to 3.9.
Today, millennials and Gen Zers are entering a dramatically less affordable market. With a home-price-to-income ratio of 5.8, buying a home is 66% more expensive than in 1985 and 49% more expensive than in 2000.
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Affordability is scarce in the most populous markets
Prices vary widely in different areas of the country, with some markets offering more affordable options than others. Even that is changing, though. The last remaining pockets of affordability are disappearing in local and regional markets.
In 2021, a home-price-to-income ratio of 2.6 or below existed in six of the 50 most populous U.S. metros: Pittsburgh, Cleveland, Oklahoma City, St. Louis, Birmingham, and Cincinnati. Two years later, all six had shot past that mark.
None of the 50 most populous U.S. metropolitan areas has a home-price-to-income ratio below the 2.6 ratio financial experts recommend.
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The most and least affordable U.S. markets
Homeowners looking for the best bargains will find some of the most affordable housing in the U.S. in the Rust Belt.
Pittsburgh has the lowest home-price-to-income ratio at a decent 3.2. That’s about 45% less than the national average of 5.8.
After Pittsburgh, two other post-industrial cities in the Great Lakes region claim the most affordable spots — Buffalo and Cleveland at 3.5. St. Louis is in fourth place at 3.6, and Denver rounds out the top five at 3.7.
On the other end of the spectrum, four of the most prohibitively expensive markets are in California, while one is in Florida. San Jose is the most unaffordable city, where the tech boom has produced a home-price-to-income ratio of 12.1. San Francisco is in second place at 10.4, followed by San Diego at 9.5, Los Angeles at 9.0, and Miami at 8.6.
In cities where even high earners face real financial challenges to purchase a home, buyers may need to use unconventional strategies.
“Buy with a like-minded home buyer,” says Cindi Hagley, a real estate agent in the Bay Area. “Share the down payment and expenses, sell after a couple of years, split the equity, and move forward with a solo purchase. Or offer the seller a higher interest rate to carry the loan interest-only for a year or so until you’ve built up equity to refinance into a conventional loan.”
Measures like these, which use a hot market to generate capital to buy into it, may become more common if prices continue to climb.
However, there is a glimmer of hope for buyers on a budget. Over the past year, the home-price-to-income ratio declined in all 10 of the most expensive markets. Pricey San Francisco experienced the most significant decline, dropping from 13 to 10.4.
If this trend trickles down from the most expensive markets to the rest of the country, home buyers could see some relief from the relentless price increases of the past few decades.
