Based on current wages and current real estate prices as of January 2019, a record-setting high 27% of homeowners would not be able to safely afford a home in their neighborhood if they bought their same house today. In other words, 88 million Americans would either struggle to qualify or be unable to afford homes in their area. To break it down: 14.2% of homeowners live in a home where the family would definitely not qualify for any home loan; and, 12.8% are on the border where they may not qualify for a mortgage, and if they did it would be a financial stretch. Some smaller percentage is expected as people move into and stay in homes as the neighborhood appreciates, but 2018’s high rates are especially ominous for many reasons.

  • 2018 saw record-high levels of homeowners that would definitely not qualify at 14.2% — a 250% increase from 1990’s rate, which was just 4.3%.
  • Among those with active mortgages (homes that are not paid off) almost 38.7% of mortgage holders could not afford a home in their neighborhood, almost double 1990’s rate of 20.7%.
  • In terms of purchasing power, wages have been mostly stagnant for all but the top 10% of earners. (source) Since 1990, inflation-adjusted home prices have almost doubled. (source) Discounting inflation, median home sale prices have increased 94% more than median wages for full-time workers. (see below)
  • Home ownership rates among young adults has been falling and is expected to continue falling. (source)
  • As the stock market has fallen, so have real estate prices in many cities.

If wages do not continue to rise to match home prices, our analysis provides evidence that current real estate price increases are far from sustainable. The graph below shows the decline in the percentage of homeowners whose income would be sufficient to acquire a mortgage in their own neighborhood.

Percent of Homeowners Able to Afford Homes in Their Area: 1990 vs. 2018

Key

% in 1990
% in 2018

 

The map below shows the data on a state level followed by insights per city. States in red have the highest percentage of households that would be unlikely to be able to afford a home in their neighborhood.


On hover or tap, the map displays nationwide ranking out of 52 (including Washington DC and Puerto Rico). Washington DC, Hawaii, and California top the list of states where families would be unable to afford homes in their area.

These 100 large cities have the highest rates where homeowners would be unable to afford homes in their area. The percentage of households who would almost definitely not qualify for a mortgage is in parentheses.

California’s home prices are legendary, but it won’t be current residents buying in most California neighborhoods. 57 of the top 100 large cities with low neighborhood re-mortgage rates are in California.

It may be surprising to see 4 Puerto Rico cities on the list but these reasonably expensive areas with low median wages. These areas are anomalous for another reason: they have some of the highest rates of free-and-clear ownership. Only cities like Naples, FL and Santa Fe, NM come close. These appear to be areas where people retire, as the number of people with paid-for homes is enormous. The influx of foreign dollars drives home prices in these areas up, which then makes it difficult for current residents to afford homes.

Who is Buying?

If residents in the area are not able to afford homes in the area, the question becomes who keeps buying property? Keep in mind that we’re looking at a combination of historical data and present data. Presumably, these homeowners were able to afford their home at historical prices. Homeowners tend to stretch to pay for a home on the higher end of affordability. Their hope is then that the home will appreciate, allowing them to sell higher than they bought. In essence, home buyers are paying not only for the current value of the home, but betting on the future price of the home. In living memory this trend has so far worked out well, excepting just one major sustained dip during the last recession.

Many Americans believe that homes are like the stock market: prices go up and down, but ultimately the trend will always be up. Home prices have increased faster than the rate of inflation for so long that any skepticism surrounding “homes as investments” is often dismissed. The problem with the idea that homes will always appreciate is that it only works if there are enough buyers coming into the market who are willing and able to pay higher prices. This is not a message of doom and gloom, but the basic economics of supply and demand. To-date, buyers have been willing to stretch and pay higher prices relative to their wages to satisfy sellers’ expectation they make money on the sale. This is largely, again, due to their belief that their investment will ultimately pay off.

Median Sale Price vs. 2-Year Wages for Full-Time Workers

Key

2x Median Gross Wages
Median Home Sale Price

 

Neither figure is inflation-adjusted because home prices are part of the CPI inflation calculation used in converting back to 1982-1984 dollar values, which confuses the actual trend. We’ve doubled annual wages for all years to allow for comparison on the same graph. Avoid over-focusing on the point of intersection, as it’s nearly meaningless. Non-inflation-adjusted home prices have increased 262% while non-inflation-adjusted wages have increased 135%, meaning home prices have grown 94% more than wages at the median since 1990. This is for full-time workers, and the average trend is actually worse for part-time workers.

This trend is only sustainable to a point. Prices cannot rise above a level where buyers cannot afford a home. If real wages do not continue to rise the price of real estate will, at some point, become unsustainable. Americans may increasingly turn to inheritance to afford homes, but inheritances are not unlimited and can only prop up ever-increasing home prices for so long. It doesn’t matter if buyers would pay for the best neighborhoods if they are unable to qualify for a mortgage at the seller’s price. We also see a trend towards minimalism, tiny houses, and high savings rates that could cut pieces off the demand side of the equation even among those who are able to afford more expensive homes and areas. This is still a minority movement with a limited number of followers, but it could further dampen the demand side of the market, which will inevitably lead to a decline in selling price.

Methodology & Limitations

Best Neighborhood completed a highly-detailed analysis comparing home prices to median incomes in the smallest possible area. Most areas include just 20 to 60 homes, though some newly-built and rural areas may be as large as 750 homes. ( The number of homes in the area that are “paid for free and clear” are intentionally excluded in the analysis, constraining the analysis to only those who are in debt with mortgages except where explicitly indicated. The reasons for this are two-fold: first, a homeowner who owns their home outright would always be able to “repurchase” a home in that neighborhood regardless of market rates. Two, free-and-clear homeowners tend to have higher net worth, which insulates them from financial hardship in all areas, including the home market. Data excludes renting the roughly 42.5 million renting households in all cases. Our primary data source was the US Census, however we used some of our proprietary data and analysis to get more granular data that is up to 45 times more detailed. It’s also important to say that equity was not considered. This was intentional, as, like inheritance money, it only delays the inevitable. Both inheritance and equity are like a lake, where the size and depth of the lake are important to present water supply, but if the lake is not fed by its rivers and streams it will eventually dry up. This analysis relates to the trend, or the flow of water in and out.

1990 was selected as a comparison point for two reasons: 1) it was about a generation ago based on age of mothers at child birth, and 2) the 1990 census contained more data than surrounding years. This would not have altered national trend data, but allows for better comparison by city.

The primary limitation in this analysis was a lack of reliable debt data by block, so averages are used instead. Overall we believe the data by area to be highly reflective of the median, and that the trends displayed are accurate.

Conclusion

This analysis does not prove that current home prices are unsustainable. Rather it shows that the current trend is unsustainable on a national scale. There is not enough growth in income to sustain rising prices, and many families would be priced out of their own neighborhoods. Based on home buyers’ behavior and attitudes towards appreciation — specifically that many are only willing to pay current prices if they can count on an equal amount or more when selling — home prices are likely to drop. Prices will likely rise and fall several times until buyers realize real estate is not a perfectly safe investment with guaranteed returns. There is good reason to think the cities and states indicated above would be hit hardest, but those numbers could be swayed by household movement throughout the country. These facts should not inspire panic, but instead caution when buying in the current market.

Published by Carson on January 15, 2019. Last updated January 19, 2019

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