It’s not just your imagination. Home prices really are getting more expensive.
Home values have climbed steadily upward across the U.S. 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.
If home prices had grown at the same rate as income since 1985, the median U.S. home would cost around $261,650 instead of $433,100.
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, today’s median home price would cost $294,000 — about 32% less than the actual price of $433,100.
Crunching these numbers reveals 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.
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 home-price-to-income ratio of 2.6 or less, which means the average home should cost 2.6 times the median annual salary at most.
Today, 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 is 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 Z are entering a market that’s dramatically less affordable. 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.
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. metros has a home-price-to-income ratio below the 2.6 ratio financial experts recommend.
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, the most affordable spots are claimed by two other post-industrial cities in the Great Lakes region — 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 an astronomical 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 purchasing a home, buyers may need to use unconventional strategies.
“Buy with a like-minded home buyer,” said 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 largest 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.