Home prices are surging faster than incomes. Here's where it's worst.

Home prices are surging far ahead of wage growth in cities across America — and those costs are continuing to increase.

An analysis of average monthly mortgage payments by brokerage Zoocasa from 2018 to 2023 across 50 cities found that the average monthly payment grew faster than median income in all of those measured markets.

In Boston, for example, the average payment grew 27.5% compared to income growth of 22.4%. In Washington, D.C., the average payment increased 35.8% compared to income growth of 19.1%.

Those are far from the most-extreme disparities, though.

In Tucson, Arizona, median income grew 27%, while the average monthly mortgage payment more than doubled — rising 126.5% during that time. Similarly, the average mortgage payment in Miami grew 117.2% compared to 30% income growth.

Most of the biggest jumps in mortgage payments came from the Sun Belt and Southwest, although places like Spokane, Washington and Buffalo, New York, both registered a doubling of mortgage payments while wage growth hung below 30%. 

There is one obvious culprit.

"A lot changed for interest rates in America between 2018 and 2023," the Zoocasa report noted. "In May 2018, average 30-year mortgages were at 4.55%, which was a bit high at the time, but nothing compared to how much interest rates would climb in 2022 and 2023. At their highest point, average 30-year mortgage rates were above 7% and have only recently started to come down into the 6% range."

That dynamic is playing out as home prices continue to go up, with single-family home prices rising during the second quarter in 89% of the metro areas measured by the National Association of Realtors. Prices rose 4.9% from a year ago to a national median of $422,100.

The monthly mortgage payment during the second quarter for a typical, existing single-family home with a 20% down payment was $2,262 — up 10.3% from a year ago, according to the NAR. Families typically spent 26.5% of their income on mortgage payments, up from 24.2% in the previous quarter and 25.3% one year ago.

“The record-high home prices in most metro markets bring good and bad news,” said NAR Chief Economist Lawrence Yun, in a statement with the NAR data. “It’s terrific news for homeowners who are moving ahead in wealth gains. However, it’s difficult for those wanting to buy a home as the required income to qualify has roughly doubled from just a few years ago.”

Where prices have risen the most

In some areas, price growth was in the double digits during the second quarter, with five of the top 10 markets for price growth coming from the Northeast, led by Glen Falls, New York, with 19.8% price growth over the same time last year. Others in the top 10 included El Paso, Texas (19.2%) and Anaheim-Santa Ana-Irvine, California (15.0%).

Seven of the top 10 most-expensive markets by price were in California, with home prices in the San Jose area rising above $2 million for the first time after growing 11.6% in the second quarter over the same time last year.

A family needed a qualifying income of at least $100,000 to afford a 10% down-payment mortgage in 48% of markets, according to the NAR, up from 40.7% in the first quarter of the year. A family needed a qualifying income of less than $50,000 to afford a home in 2.7% of markets, down from 4.5% in the prior quarter.

“Housing affordability will improve in upcoming months,” Yun said. “Mortgage rates have fallen measurably, and more supply is reaching the market. Therefore, the income required to buy a home will decrease.”

Research from the Federal Reserve puts the median sale price of a house sold in the United States during the second quarter at $412,300, down from $418,500 during the second quarter of 2023 and down from a $442,600 peak in the fourth quarter of 2022. 

Still, many Americans are pessimistic about their ability to purchase a home, according to a survey by new-construction marketplace NewHomesMate. Fifty-seven percent of respondents said they doubted they could ever afford their “dream” home. The research also found that 58% of respondents said they would be open to downsizing to afford a home, while 31% would be willing to extend their commute to work. 

NewHomesMate calculated it now takes an income of $115,000 to afford the typical home — about $40,000 more than what the average household earns.

A majority of the respondents (58%) said $250,000 or less is “reasonable” for the price of a single-family home. 

Mortgage rates may fall and give buyers relief

Homebuyers frustrated by high mortgage rates may soon get some relief if the Federal Reserve begins to lower interest rates — but they should temper their expectations, experts say.

While the Fed has signaled it could start lowering rates next month, industry experts believe rates will never go back to the historic lows seen during the Covid-19 pandemic, when some buyers snagged rates below 3%.

“Rates are never going to get back to where they were during the pandemic,” said Marty Green, a principal at law firm Polunsky Beitel Green. “I think getting into the 4 to 5 [percent rates] is definitely in the cards over the next 18 months or so."

That would translate into hundreds of dollars a month in savings over current rates, which are hovering around 7%. Mortgage interest rates are several points higher than the Federal Reserve rate, although that larger spread sometimes allows those rates to fall faster as overall rates go down, Green said.

Some experts are expecting rates to only drop a bit as the Fed tries to balance cuts now and a federal deficit that leads to more borrowing in the future.