The American Dream Erosion: Mortgage Rates Eat Away at Affordability as Homebuyers Lose Bedroom Worth of Space

This end of the year brought the highest fixed mortgage rate in decades — and, with it, a tough question to answer: How much can we afford to spend on a home anymore?

For those playing the waiting game and hoping for a better housing market on the horizon, a daunting realization has set in: Last year’s income would have bought more for less.

As prices stray further from what qualifies as someone’s “within budget”, buying power is diminishing for aspiring homeowners who find home prices — and sizes — far exceeding their income. And, nowhere is this combined freefall of affordability and space more deeply felt than in some of the nation’s 100 largest cities.

• Compared to last year, the average 2023 home seeker in the U.S. could afford to spend about $3,100 less on a home. Although not encouraging, it’s a drop in the ocean compared to the y-o-y $96,800 loss in buying power that they experienced last year.
• Those looking for a home in Lincoln, NE, Oklahoma City, and Tulsa, OK, lost more than $30,700 of their budget for a home; Following the latest rate increase, those in 9 other cities could afford $20,000 to $30,000 less than what they could in 2022.
• Buying power is not the only thing that aspiring homeowners lost, as buyers in 61 large cities now afford less living space than they did last year; Home seekers in Detroit, MI, Tulsa, OK, and Wichita, KS, lost the most — more than 300 square feet.
• With the average size of a bedroom in the U.S. around 132 square feet, some of these drops in space represent the equivalent of 1, 2, or almost 3 bedrooms.
• The property ladder is less shaky in cities that experienced gains in buying power: Homebuyers in 7 large cities —  including Irvine, CA, San Francisco, Anchorage, AK, and Washington, D.C. — could afford to spend $30,000 more than last year.

The uphill battle with mortgage rates was experienced across the nation. Fixed mortgage rates climbed from around 3% at the end of 2021 to 7% at the end of last year to about 7.5% as of this November — the highest levels in 20 years. Last year’s dramatic uptick prompted Point2 to analyze its impact on affordability and the average living space that comes with it, with equally dramatic results. While yearly changes this time around are not as harsh, things are far from ideal for the median-income homebuyer in 2023 — a year defined by drastic measures to fight inflation.

Back in 2022, the average American on a $74,800 median income was able to afford a $278,200 home. That's assuming a standard 20% down payment and a 30-year, fixed-rate mortgage (including insurance and taxes) that wouldn’t require more than 30% of their monthly income.

Although the median income in the United States has increased to nearly $78,200 this year, the average homebuyer can now afford to spend even less on a home. More precisely, aspiring homeowners would be able to buy a $275,000 property in 2023 — meaning exploding interest rates and dragging incomes that can't keep up have lost potential homeowners more than $3,100 in buying power. What’s worse, with the national median sale price at $412,000, this hypothetical $275,000 home that buyers could actually afford has become a unicorn in the U.S. housing market.

Mortgage Rates Surge, Cause Buying Power Shifts Among Country’s Largest Cities

In just one year, home seekers in Lincoln, NE, Oklahoma City, & Tulsa, OK, lost more than $30,700, whereas they gained  more than $42,000 in Irvine & San Francisco, CA

Back in 2022, homebuyers in about half of the country’s 100 largest cities were crippled by losses of more than $100,000  in buying power compared to a year prior. This year, the differences in affordable home prices are not as significant as they were in that post-pandemic period. In fact, in a surprising balancing act, buyers in 50 of the 100 largest cities deal with drops in affordability, while those in the remaining 50 cities could now afford more.

However, the affordability crisis is highlighted by the fact that the median home price in the U.S. is now 50% higher than the affordable home price. What’s more, the share of homes that fall under this “affordable” category makes up less than 28% of the national for-sale inventory.

Notably, in many large urban centers, the median home price is twice what the average buyer can afford (assuming a 20% down payment and a 3%, 30-year, fixed-rate mortgage). The outlook is harsher for those looking to buy a home in Los Angeles or New York City, where the median home prices are more than 200% higher than what they could afford without being financially burdened.

In light of mortgage rate hikes and increased prices, the very concept of affordability slips further and further away. And, nowhere have home seekers lost more money than in the capital city of Nebraska. On a median income of $65,261, buyers in Lincoln could afford to spend only $191,053 on a home. For comparison, one year ago, they could’ve afforded a more expensive, $229,706 property on a smaller, $62,391 median income. This has led to a disappointing $38,650 loss in buying power in just one year.

Similarly, data showed that home seekers in Tulsa, OK, are not much more fortunate. In 2022, potential buyers here could afford properties worth a little more than $203,000. Now, the average home seeker looking for an affordable home in Tulsa could afford one priced around $168,000 — which is $35,000 less than last year. Nearby, Oklahoma City, Kansas City, MO, and Wichita, KS, are among the cities where home seekers lost more than $29,000 in buying power in just one year.

That said, some cities were not as affected by the affordability squeeze.

Top median wages make affordability possible in Irvine and San Francisco, despite home prices of around half a million dollars. As such, buyers in the two California powerhouses enjoy the biggest gains in buying power: About $53,050 and $42,350, respectively. Likewise, buyers in 48 other large cities can now afford more compared to last year, ranging from a modest $250 more in Seattle and Nashville to a cushy $39,800 more in Anchorage, AK.

Big Cities Make Living Large Difficult: Buyers in 61 Urban Centers Can Afford Less Living Space Than in 2022

Living in Detroit, Tulsa, OK, Wichita, KS, & Lincoln, NE means affording fewer square feet; Memphis, TN, Buffalo, NY, & Boise, ID, gain bedroom's worth

Averaging 2,164 sq.ft., homes in the U.S. are among the largest in the world. But in a housing market plagued by skyrocketing home prices and mortgage rates, that’s little comfort for potential buyers operating on a simple correlation: The bigger the home, the bigger the price. And, in a year defined by historical mortgage rate hikes, the reality is even bleaker as, on the contrary, a smaller home also commands a big price.

Assuming a standard 20% down payment and a monthly mortgage payment (again, as part of a 30-year, fixed-rate mortgage and including insurance and taxes that don’t represent more than 30% of the household median income), our study defines an affordable home as a property that could be purchased by the average homebuyer without being financially burdened while on a median income. Because the median income, home prices, and price per square foot vary from city to city, those who lost the most buying power did not necessarily experience the most significant losses in living space.

For instance, among the country’s largest cities, homebuyers in Lincoln, NE, lost the most buying power. To top it off, they also had one of the biggest losses in living space: 297 sq.ft. fewer than last year, or the equivalent of more than two average bedrooms.

But the city where buyers lost the most space due to climbing mortgage rates and prices was Detroit: More than 370 sq.ft. since 2022, or the equivalent of almost three bedrooms. Despite having the most modest price per square foot ($69/sq.ft.) as well as the most affordable home price among the largest cities ($111,750), the city’s $38,130 median income couldn't seem to keep up.

Also losing two bedrooms-worth of living space were buyers in Tulsa, OK: Home seekers here went from being able to afford a 1,575 sq.ft. home last year to just 1,234 sq.ft. this year. Wichita is in a similar position after having lost 313 sq.ft. in just one year. Moreover, buyers in this Kansas city were among the biggest losers in square footage in 2022, and continue to lose this year, going from being able to afford 1,958 sq.ft. to 1,645 sq.ft.

Yet, despite the nationwide growing pains of homebuying, home seekers in some large cities can afford more living space compared to last year.

For example, potential buyers in Memphis, TN, can afford 164 sq.ft. more than in 2022. In fact, the price per square foot is just $120, as opposed to more than five times this amount in other large cities. Notably, the Home of the Blues is among the very few big cities where the affordable home price is larger than the median home price (alongside Fort Wayne, IN, Detroit, Cleveland, and Toledo, OH).

Other lucky homebuyers who could now afford more than 100 sq.ft. than what they did last year are in Buffalo, NY (161 sq.ft.), Boise, ID (144 sq.ft.), North Las Vegas, NV (131 sq. ft.), Jacksonville, FL (121 sq.ft.), and Arizona’s Mesa and Glendale (both 101 sq.ft.).

As the year closes with the highest fixed mortgage rates in decades, 2023 has further shrunk Americans’ living space and buying power. And in this seemingly never-ending quest for affordability, it’s hard for would-be owners not to feel kicked down the property ladder like never before.

Take a look at the full set of cities analyzed for more details about the y-o-y differences in affordability and living space.

Methodology

Point2, a division of Yardi Systems Inc., covers real estate trends and news. Point2 studies are based on internal data, public records, governmental sources, online research, and other reliable third-party agencies.

• For this study, we took into consideration the 100 largest U.S. cities, according to the most recent population data from the U.S. Census Bureau.
• Based on the household median income in each city and assuming a standard 20% down payment; a monthly mortgage payment (including insurance and taxes) that doesn’t represent more than 30% of the median household income; and a 30-year, fixed-rate mortgage, we calculated how much house a median-income homebuyer could afford last year and again this year, taking into consideration the 7% mortgage rate from last year and the 7.5% rate from November 2023. We then compared the two amounts to calculate how much buying power the average homebuyer lost year-over-year in the United States.
• Median household income sourced from the 2022 ACS 1-year estimates, adjusted for 2023 using the Employment Cost Index Wage and Salaries increase from September 2022 to September 2023.
• Based on price per square foot data from Redfin for 2022 and October 2023, we translated the affordable amounts into affordable square footage and number of bedrooms, comparing 2022 and 2023 results.
• The assessed value used for calculating the property tax may be subject to various exemptions, depending on local/zonal policies.
• Insurance costs may differ, depending on home value, home condition, and personal credit score.

Fair use and redistribution

We encourage and freely grant permission to reuse, host or repost this article. When doing so, we only ask that you kindly attribute the authors by linking to Point2Homes.com or this page, so that your readers can learn more about this project, the research behind it and its methodology.