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Have you heard the groans of college grads and young professionals, overwhelmed because they can’t find an affordable house? We have, and we believe their concerns are justified.
Appropriate financial planning and establishment of healthy financial habits starts with foundational ratios and discipline. Purchasing a house is a huge milestone for anyone, but particularly those just getting started. Homeownership is part of the American dream! We decided to crunch the numbers to see why there are so many concerns from young individuals.
Using data from the Federal Reserve Bank of St. Louis, we looked at average home prices from a decade ago. In 2013 fourth quarter, the average home price in the United States was $273,600 and the average mortgage rate was 3.98%. The gross income needed to maintain a 28% housing ratio was $44,657. The mean personal income in the United States in 2013 was $42,390. Comparing these numbers to 2023, things are drastically different. In 2023 fourth quarter, the average home price in the United States was $417,700. The average mortgage rate was 6.81%, and the gross income needed to maintain a 28% housing ratio was $93,471.
Look at the numbers yourself. Notice the exponential increase over time.
| 2013 Q4 | 2023 Q4 | Percent Increase | |
| Average Home Price | $273,600 | $417,700 | 53% |
| Average Mortgage Rate | 3.98% | 6.81% | 71% |
| Down Payment (20%) | $54,720 | $83,540 | 53% |
| Amount to Finance | $218,880 | $334,160 | 53% |
| Estimated Monthly Payment | $1,042 | $2,181 | 109% |
| Estimated Annual Payment | $12,504 | $26,172 | 109% |
| Gross Income Needed to Maintain 28% Housing Ratio | $44,657 | $93,471 | 109% |
Here lies the problem. The average wage growth rate from 2013 to 2023 has been 3.4% per year, which means the average income of $44,657 back in 2013 is equivalent to about $62,387 today. While that might seem wonderful, remember that the gross income needed to responsibly afford the average home in America (maintain a 28% housing ratio) is now above $93,000. Most college graduates and young professionals don’t have an annual income nearing $100,000. In fact, the average age to marry is trending up, meaning young professionals nowadays don’t have a joint income to be able to afford a starter home at today’s prices.
I cannot tell you how many times I hear people say to buy something and re-finance when rates come down! Well, the aggressive rate cut forecast that the “experts” were calling for at the beginning of the year doesn’t look as promising today. Being financially responsible and saving using the appropriate vehicles (retirement accounts, Roth IRAs, individual brokerages, etc.) sometimes requires you to turn the volume down on people who might not know what they’re talking about. If you try to afford something out of reach, what is the opportunity cost? That’s an economist’s way of asking, “What else are you sacrificing?”
Do you know what you’re sacrificing to afford your lifestyle? If not, I advise you to speak with someone who can make you more aware. Do your homework. It’s important to pay attention to the data and abide by financial ratios so that your financial house runs like a well-oiled machine.
Be well,
Spell Carr
