The Worsening State of Mortgage Affordability in 2021

This goes against the common wisdom of financial advisors that says homeowners should avoid spending more than 28% of their gross income on their mortgage. 

In this post, we’ll discuss the findings and try to find out what it means for new homeowners in 2021.

Study Highlights

For the study, figures from between 2010 and 2020 were analyzed to draw a series of conclusions about the current state of the real estate market. According to the study, the most interesting findings include:

• In many parts of the US, new homeowners spend more in monthly mortgage payments than is advised. In many cases, mortgage payments make up more than 30% of a homeowner’s gross income each month.
• There are just 11 cities in which the income spent on mortgage has remained mostly unchanged in the past decade.
• For the most part, home prices have increased faster than wages in 53 cities out of 100, while mortgage affordability has decreased in 51 out of 100 cities. 

This indicates that mortgage affordability has worsened considerably in the past decade across large parts of the US.

The Hardest-Hit Cities

In terms of the most cost-burdened cities in the US, Honolulu, HI, takes the number one spot. On average, homeowners spend 41% of their gross income on mortgage payments each month. It’s also the only city on the list where homeowners have spent over 40% of their income on mortgage in both 2010 and 2015.

Looking at the top 15 most cost-burdened cities in 2020, it’s perhaps no surprise that California holds the lion’s share, with 10 entries. Los Angeles is ranked #2, with homeowners spending 41% of their income on mortgage, followed by Oakland at #3 and San Francisco at #4, where the mortgage takes up 39% of the household income. Outside of California, New York ranks #5 on the list, also at the 39% mark.

The Problem with Rising Home Prices

Cities with the most impressive increase in home prices tend to abound on the West Coast. Santa Ana saw a price increase of 77% in the past 10 years, Fremont went up by 88%, while Oakland, Aurora, CO, and North Las Vegas, NV, have seen prices skyrocket by 90% and even 100%. In comparison, Los Angeles and its 57% house price increase seems almost tame.

Million-Dollar Price Tags

Three of the cities on the most cost-burdened list have also seen the median house price jump the $1 million mark. All are located in California. 

• San Francisco homes cost 61% more in 2020 than they did in 2010, a steep increase from $768,000 to $1,239,415. 
• The price increase is even steeper in the case of Fremont, seeing an 88% rise from $590,00 in 2010 to $1,106,261 in 2020. 
• San Jose is not too far behind, with an 82% increase in the last decade, from $558,600 to $1,017,898.

At the lower end of the spectrum, the following cities have only seen a 3% difference between the median home price in 2010 vs 2020: Newark, NJ, Norfolk, VA, and Milwaukee, WI.

The Widening Gap between House Prices and Income Growth

What makes these steep price increases so problematic for new homeowners is the fact that the median income has yet to keep up. Five out of the 100 cities in the study have a gap between the home price growth and income growth that exceeds 50%. Not only that, but they are also the cities where income has been lagging behind the most in the past 10 years.

For example, home prices in North Las Vegas have risen by 104% between 2010 and 2020, while the annual household income only saw a 29% boost. Las Vegas and Paradise, NV, also saw a house price boom of 87% and 80% respectively, but local incomes have only increased by around 20%. In Aurora, CO, the difference between home price increase and income increase is 56%, and in Stockton, CA, it’s 52%.

As it stands, those looking to buy a home in these areas find themselves in a position where it’s not feasible to keep mortgage payments within the desirable sub-30% of their income range. And they’re not the only ones. 

Unobtainable Income Increases?

Given the discrepancies between house prices and median income, homebuyers in 9 out of the 15 most unaffordable cities will need to earn a minimum of $10,000 more if they wish to keep their mortgage payments under 30%.

• San Francisco boasts a 34% difference between actual income vs necessary income, meaning that homebuyers will need to earn an additional $43,567 to avoid being cost-burdened. 
• Those prospecting the Honolulu market will need an extra $30,985 to mitigate the 41% income discrepancy. 
• Los Angeles homebuyers will need to boost their annual income by $28,598.
• Those looking to buy a home in New York, NY, will need at least an extra $24,210.

Seeking Silver Linings

Despite the hard hitting figures we’ve mentioned so far, the study also highlights some positive developments in terms of mortgage affordability. In 45 markets out of the 100 in the dataset, incomes had increased faster than home prices. 

Cleveland and Toledo, OH, are prime examples in this case, with household income increasing by 29% and 21% respectively in the past 10 years. For both these cities, the difference between the median home price in 2010 vs 2020 actually has negative values, at -2% for Toledo, and -11% for Cleveland. 

Meanwhile, Newark, NJ, has seen a decrease in mortgage unaffordability from 34% in 2020, to 27% in 2020. Seattle and Indianapolis also rank high in terms of mortgage availability, with a mere 1% difference between income and house prices.

Six Affordable Cities

There is definitely hope for homebuyers looking at the market in 2021. In fact, there are 6 large cities boasting a very attractive availability rate, where homeowners can expect to pay 10% or less of their income on mortgage. 

Detroit, MI, is by far the most affordable large city in the US at the moment, with mortgage payments taking up a mere 7% of the average household income. Cleveland and Toledo follow close by, at 9%. It’s also worth mentioning that these three cities boast not just affordability, but also incomes that have been increasing at a faster rate than median home prices. 

Other examples of affordable large cities include Fort Wayne, IN, Laredo, TX, and Memphis, TN, all three requiring homeowners to pay just 10% of their income on mortgage. 

At first glance, the findings certainly don’t look fantastic for new homeowners in 2021. Indeed, the gap between income and house prices in many major cities leaves a lot to be desired. However, there are cities that buck the trend, and are actually rather affordable for new homeowners.

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