Pay Raises Aren’t Keeping Up With Rise In Home Prices, Mortgage Rates

As demand for homes spiked and drove prices up over the last year, buyers could at least lean on falling mortgage rates and rising wages to keep their monthly costs in check.

But now, mortgage rates are climbing from their historic lows even as home prices continue their bullish trend, placing additional pressure on household budgets, according to the latest report from Attom Data Solutions.

This about-face in mortgage rates has steadily eroded home affordability throughout most of the U.S., and that continued well into the fourth quarter of 2021. The primary ownership costs for the typical home rose to 25.2 percent of the average household income in the last three months of the year, up from 24.4 percent the previous quarter, Attom said.

“The average wage earner can still afford the typical home across the United States, but the financial comfort zone continues shrinking as home prices keep soaring and mortgage rates tick upward,” Attom Chief Product Officer Todd Teta said in the report. 

Traditionally, lenders have wanted to see borrowers keep their major home costs — mortgage payment, property taxes and home insurance — within 28 percent of the amount of money they bring in each year. This helps ensure the borrower is in a position to make the payments on the loan.

But home price growth over the past year has pushed the U.S. to a position where more new homeowners are likely to feel strained by their housing costs. Home prices are up 17 percent year over year, reaching a record high of $317,500 for the median home.

This price growth has yet to exceed the standard lenders are comfortable with for the majority of buyers. Still, the effect of the past year has swiftly undermined overall home affordability.

The erosion of home affordability hit the vast majority of the country. Nearly 4 in 5 counties Attom analyzed in its report saw home prices outpace wage growth in the last three months of the year.

The most populous counties that saw an erosion in home affordability this quarter were home to major cities that included Houston, Phoenix, Miami and multiple California metros.

Some pricier metros gained a bit of extra breathing room in recent months. Places where wage growth outpaced housing cost increases included some big metros where prices were already high, such as Los Angeles, Chicago, New York City and Seattle.

Earlier in the pandemic, increases in home prices were largely offset by rising wages and falling interest rates.

But since the start of 2021, mortgage rates have gradually climbed, making it tougher for some buyers to afford the increasingly expensive houses on the market.

This shows up in Attom’s data as well. In the final three months of last year, the primary costs of owning the typical home took up 21.5 percent of the average income. A year later, they took up 25.2 percent.

“Amid very uncertain times, with the pandemic again threatening the economy, we will keep watching this key measure of housing market stability,” Teta said in the report.

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