As the cost of housing continues to climb across the United States, many would-be homebuyers are finding themselves in a difficult position. According to a recent Redfin report, to afford a home in the nation’s most expensive metro areas, prospective buyers will need to earn well above the median household income.
For the vast majority of Americans, this presents a financial challenge. In fact, the median household income in the U.S. was $75,000 in 2022, making it clear how much more earning power is required to purchase a home in areas with soaring real estate prices. The report finds that buying a home in the priciest metros requires salaries upwards of $400,000, a stark contrast to the national average.
The Growing Wage Gap in Housing Affordability
The increasing cost of homeownership, driven by both high prices and rising interest rates, is reshaping the housing market. As of August 2023, the typical U.S. homebuyer needed to earn $114,627 annually to afford a median-priced home. But in areas with the highest real estate prices, that number climbs drastically.
San Francisco and San Jose in California are at the top of the list. Homebuyers in these two cities need to bring in more than $400,000 annually to make a purchase. Specifically, to afford a home in San Francisco, you’d need a salary of around $404,332, and in San Jose, it’s slightly lower at $402,287.
California dominates the list of expensive metros, with Anaheim, Oakland, and San Diego also requiring high salaries—between $240,000 and $300,000 a year. These figures reflect a unique combination of high wages and extreme housing prices, with interest rates making mortgages even harder to secure.
Why New York City Doesn’t Top the List
While New York City, particularly Manhattan, is famous for its exorbitant cost of living, the New York metro area itself doesn’t rank among the top spots for homebuyers. This is because the metro area encompasses not only the five boroughs of New York City but also surrounding regions in New Jersey and Connecticut. Consequently, the overall cost of living becomes more affordable once you move outside the city’s heart.
Despite this, buying a home in the New York metro area still requires a six-figure salary—around $197,734, according to Redfin. While this is a significantly lower threshold than cities like San Francisco or San Jose, it remains high in comparison to the rest of the country.
The Rise of All-Cash Buyers
In the face of rising mortgage rates, many homebuyers are opting to pay in cash instead of taking out loans. This trend is particularly common among veteran homeowners who use their equity to make purchases without the need for financing. However, this trend is pricing out first-time homebuyers, who are increasingly unable to compete in such a tight market.
As of September, the share of first-time homebuyers had dropped to 27%, down from 29% the previous month, according to the Realtors Confidence Index. On the other hand, the share of all-cash buyers increased to 29%, highlighting the growing difficulty for newcomers to enter the market.
Older buyers, who can tap into their existing home equity, often dominate the market in expensive metro areas. Some of these buyers are local, while others are moving from less costly regions, further exacerbating the affordability gap.
Conclusion
The dream of homeownership remains out of reach for many Americans, particularly in high-cost metro areas like those in California. With rising interest rates and competition from cash buyers, prospective homebuyers face increasing obstacles. As housing prices continue to climb, the need for higher wages to secure a home is more pressing than ever.