Buying a home started to be accessible for many Americans in the 1950s with the introduction of the 30-year mortgage. The economic and political dominance of the US in the post World War II era also provided buyers with a favorable environment for homeownership. However, in recent years, it has become increasingly unattainable for many due to the disproportionate rise of home prices relative to incomes. In the current environment, aspiring homeowners must conduct an honest and realistic assessment of their situations, since buying a home exceeding their means can have financially detrimental consequences.
Although homeownership in recent decades has been seen as a common milestone in one’s life, making a decision to buy a home is complex, and can be challenging. It requires a careful consideration of various factors including location, price, interest rate, and monthly mortgage payment, among others. What is evident is that buying a home is no longer for the average person.
One indicator of home affordability is comparing the median price of homes with median income. In 1980, homes were affordable with the median home price being approximately 2.5 times the median income. In contrast, by 2022, this ratio had risen to over 11 times. This change shows that a typical working American could manage to own a home in 1980, but it was no longer the case in 2022, and it has not been so since the 2000s.
| Year | A.Median Home Price | B.Median Income | A/B |
| 1980 | $64,750 | $25,380 | 2.55 |
| 1990 | $122,300 | $29,540 | 4.14 |
| 2000 | $167,550 | $34,570 | 4.85 |
| 2010 | $222,700 | $34,160 | 6.52 |
| 2020 | $336,950 | $40,420 | 8.34 |
| 2022 | $457,475 | $40,480 | 11.30 |
While there are various widely accepted rules of thumb to determine what homes one can afford, a relatively reliable guideline is to keep the home purchase price under three times one’s annual income. By following this rule, individuals can expect to pay off the home in ten to fifteen years by allocating approximately one-third of their before-tax incomes to mortgage and interests payments.
Since $450,000 was the national median home price in 2022, by taking one-third of this value, it requires an income of $150,000 to own a typical home. However, if one wishes to live in the vicinity of cities with a high level of convenience, home prices there could be $600,000 or more, like in the Washington DC area. Taking one-third of this price, in order to experience sustainable ownership, it requires an income of $200,000 a year, with a great deal of certainty that such income will continue for at least ten to fifteen years; something only a small minority of the population can reasonably expect.
In the current political and economic climate, coupled with a rapid development in technology, I find it difficult to feel secure about what the future may hold. For this reason, I believe the popular 30-year mortgage appears to be too risky for most individuals. My suggested rule of thumb for the majority of people is to buy a relatively inexpensive home outright with cash, or if taking out a mortgage, to do so from a place where it is possible to pay it off at one’s discretion. I hold this view since I believe homeownership for the average person could jeopardize their ability to save for retirement.
Despite the fact that homeownership has become elusive for many, it does not mean that one should give up hope of owning a home. One recommendation I have for aspiring homeowners is to aim to accumulate financial assets including cash and investment portfolios that are around the national median home value. I suggest this amount since asset prices including stocks and properties tend to rise as the currency circulation in the economy increases. If you have financial assets that are comparable to the value of a typical home, it could be a safeguard against getting priced out of homeownership.
I believe this situation offers more financial freedom than owning a home that you cannot truly afford. Even during low-interest environments, fixed maintenance costs may still consume money that could have been allocated to your retirement. Even if you are still currently far off from this savings target, following this strategy enables you to continue building financial assets and increase your ability to purchase a home when a good opportunity arises.
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The Well Tempered Investor 