Filed under: Home BuyingIf the traditional American dream is homeownership -- getting the starter, trading up as the family grows -- then in most of the largest metropolitan areas, the middle class is officially in a nightmare. In only 12 out of the biggest 25 cities, median income households can afford median-priced houses, according to data analysis out today by Interest.com.
That's better than last year, where median-income households could afford homes in only eight of the cities. But as things stand now, housing prices will continue to pull away from incomes, Interest.com managing editor Mike Sante told DailyFinance.
Housing Prices Are Rising Faster
"We're seeing the increase in home prices definitely moderating," Sante said, pointing to a 16 percent increase last year and a 6 percent one in 2014. "We've recovered about as much as we're going to cover. However, median incomes were only up a little more than 2 percent in the 25 largest cities," but a drop in mortgage rates helped.
The site compared home prices from the National Association of Realtors to income figures from the Census Bureau's American Consumer Survey, calculating what income was necessary to afford a 20 percent down payment, interest and other city-specific costs.
"The rule of thumb is you shouldn't be spending more than 28 percent of your income on gross housing costs," Sante said. Many in New York spend more than half. Some people in San Francisco spent 70 percent. "I about fell out of my chair [when I realized that]," he said.
They're House-Poor and Have Problems
"When you start spending 40 or 50 percent on housing, that's the definition of being house-poor," Sante said. "You're constantly having to say, 'No, I can't do this' or, 'No, we can't buy this,' or, 'No, we can't save money for retirement because we don't have money left over.' We're telling people, 'You have to save for your own retirement,' but then housing costs keep going up, so more and more of the income they have winds up having to be devoted to housing." As people are forced to pay more for housing, they put retirement and children's education into danger.
The five most-affordable metropolitan areas, and by what percentage median household income exceeds that necessary to buy a median-priced home, are:
- Minneapolis (+23%)
- Atlanta (+22%)
- St. Louis (+20%)
- Detroit (+14%)
- Pittsburgh (+13%)
- Miami (-26%)
- Los Angeles (-32%)
- New York (-32%)
- San Diego (-38%)
- San Francisco (-46%)
Software Engineers, Bankers, Teachers and Firefighters
In some areas, even many more affluent people find they must divert a larger amount of their income into housing. "There are certainly lots of folks in the tech industry being paid very good salaries [in San Francisco], bidding up home prices, but even those folks are spending way too much on housing," Sante said.
"There's a certain amount of income disparity that is driving home prices in some of these big cities," he said. "The software engineers and investment bankers are making it impossible for the teachers and firefighters to buy homes in these big cities. I wish I could say this is going to get better, but the best I can say is it may not get worse as quickly as it has. But the trend lines are incomes not keeping with home prices."
According to Sante, cities and states could take action, like ensuring a supply of moderately priced housing. "You can't count on contractors doing that because they can make so much more money from more expensive houses."