I have a perpetual curiosity, always seeking to unravel the reasons behind the status quo. There’s a certain thrill in connecting the dots and crafting an investment strategy that holds the potential for substantial gains. Recently, a revelation has come to light: the remarkably low minimum qualifying income needed to purchase a house suggests that there is still a considerable room for housing prices to climb.
For years, I’ve maintained the stance that Americans tend to earn and possess more wealth than commonly acknowledged. Finally, after a three-year wait, the U.S. Census Bureau released 2019 data in 2020, revealing that the real median household income had reached $68,703.
This figure marks a healthy middle-class income. However, the question arises: Can an income of $68,703 adequately afford a median-priced home?
To find answers, I turn to data from the California Association of Realtors (CAR) on the minimum household income required to afford a home.
Minimum Qualifying Income Required To Purchase A House
As illustrated below, the United States, as a whole, boasts a surprisingly low minimum qualifying income essential to buy a home—only $54,800. It’s no wonder that the single-family rental market remains robust.
U.S. housing affordability – The Minimum Qualifying Income Required To Purchase A House Is So Low
If CAR’s report is accurate, households earning close to $69,000 annually—the median income—enjoy a substantial $14,000 income cushion for home purchases. In other words, households at the median income level can manage mortgage payments that are 25.5% higher than those required for a median-priced home.
The CAR Traditional Housing Affordability Index, based on a median-priced home, a 20% down payment, average mortgage interest rates, and PITI (Principal, Interest, Taxes, and Insurance) not exceeding 30% of gross income, underpins this affordability calculation.
While many homebuyers put down less than 20% and allocate over 30% of gross income to PITI, the CAR’s housing affordability definition remains notably accurate.
Potential Upside of 25% in U.S. Home Prices
Should mortgage rates and the median U.S. household income remain stable over the next few years, U.S. home prices could theoretically experience around 25% further growth.
For instance, if the current median-priced home in the U.S. stands at $291,300, the potential future value might rise to approximately $364,125 in several years.
Of course, local housing markets differ. In the short term, 18-hour cities might appreciate faster than their 24-hour counterparts. Thus, diversifying real estate investments accordingly might be prudent.
However, over the long term, my bullish outlook on 24-hour cities persists due to ongoing robust job opportunities, network effects, and other contributing factors.
I anticipate that mortgage rates will remain low for at least the next decade, and median household income will remain buoyant. It’s unlikely that real median household income will plummet by $14,000 to $54,800 within a few years. Even if it did, mortgage rates would likely decrease further to support housing affordability.
Consequently, the U.S. housing market still offers substantial growth potential. By 2026, the median U.S. home price could very well be 20% to 25% higher. A significant driving force is the family formation phase currently underway among millennials.
If you haven’t already, consider refinancing your mortgage to capitalize on record-low rates. Take a look at Credible, an online lending platform that provides no-obligation quotes from competing lenders in minutes. Mortgage rates are on the rise, so consider refinancing before they increase further.
Thriving in a Costly City
Having presented a bullish case for the U.S. median home price, I now shift focus to thriving in San Francisco with two children and two stay-at-home parents.
In gauging middle-class expenses, I closely follow the minimum qualifying income needed to buy a home and healthcare costs. I also track private school tuition, which predominantly pertains to upper-class decisions.
A middle-class lifestyle constitutes a reasonable aspiration. However, inflation, intense competition, and significant drops in interest rates have complicated the achievement of middle-class status or maintaining it.
In 2018, when I authored the article “Why Households Need To Earn $300,000 To Live A Middle–Class Lifestyle In An Expensive City,” it was met with criticism. Many believed that needing $300,000 to support a family was excessive, despite compelling cost of living evidence.
To clarify, that post responded to calculations by the California Association Of Realtors (CAR), not my own. The latest figures confirm that the necessary income today is closer to $322,000, a 7.3% increase. Refer to the following updated data:
The Minimum Qualifying Income Required To Purchase A House Is So Low!
Cross-Checking the Minimum Qualifying Income
A minimum income of $322,000 may seem substantial. However, following my 30/30/3 home-buying rule, $322,000 is insufficient! Given San Francisco’s median home price of about $1,600,000, the household median income would need to approach $533,334.
Nonetheless, living in an expensive region might stretch to a 5X multiple of household income, primarily due to the significant decline in mortgage rates. Consequently, $322,000 X 5 results in $1,610,000, aligning neatly with San Francisco’s median home price.
Thankfully, six-figure incomes are relatively common in locales like the Bay Area. The typical starting compensation package for graduates joining major tech firms exceeds $100,000. The challenge may lie more in assembling a 20% down payment alongside a 10% cash or liquid securities reserve.
A mortgage of $1,288,000 with a 20% down payment at a 3% interest rate totals a manageable $5,430 monthly. This equates to 20% of a $26,833 gross monthly household income ($322,000 annually).
Let’s delve into healthcare costs now.
Surging Healthcare Expenses
For households that are self-employed or unemployed, shouldering the entire cost of family healthcare insurance premiums becomes unavoidable. Based on my research, for Gold and Platinum plans, a family of four will bear an annual expense ranging from $27,000 to $30,000 for 2021 and beyond.
Naturally, if one spouse works and secures subsidized healthcare, it becomes challenging for a single income to reach the required minimum of $322,000.
Examine the specifics of the two healthcare insurance family plans we’re considering. Does $2,532/month for healthcare seem reasonable to you?
High healthcare costs prompt a reevaluation of the minimum qualifying income for home ownership
Struggles Await Retirees with Debt
Mortgage debt necessitates a minimum household income of $322,000 to sustain a middle-class lifestyle in an expensive city. The low minimum qualifying income required to purchase a home seems inadequate.
If you can afford to pay off your home or pay cash, the need for a $322,000 annual income diminishes. By deducting the mortgage payment—$5,430 per month ($65,150 per year)—on a median-priced home with a 20% down payment from $322,000, the new minimum income requirement becomes $256,850 ($21,404 per month).
Yet, even the notion of needing $21,404 per month appears unnecessary with
a mortgage. Suppose two children attend private school, incurring a total monthly cost of $10,000. That leaves $11,404 per month for expenses like food, clothing, maintenance, taxes, travel, and transportation.
A $256,850 annual household income for a debt-free household should amply suffice. My family of four lives comfortably on less than this annually.
Resisting the Temptation to Inflate Passive Income
As the cost of living escalates, the allure of padding passive income becomes more tempting for retirees or those striving for retirement. Some individuals, instead of including income solely from investments, include active income from endeavors like online businesses, consulting, food delivery, etc., as sources of passive income.
While such manipulation might offer momentary satisfaction when exiting a high-paying job, the realization that true financial independence remains elusive lingers.
A wiser path involves acknowledging that true financial independence hasn’t been reached. This realization liberates individuals to proactively explore income generation. In an environment characterized by persistently low interest rates, adaptation is essential.
Continuously Anticipate the Next Few Years
When readers branded me an early retirement failure for seeking to return to work in 2018 to brace for a potential downturn, I accepted the criticism and embraced my shortcomings. Embracing failure spurred a marked improvement in my financial standing.
I’m genuinely appreciative of the consistent critique that fuels financial growth and elevates our family’s lifestyle. So, please, keep it coming!
By foreseeing a couple of years ahead before the birth of our daughter, we effectively prepared for the ensuing financial responsibilities. This foresight enabled us to invest in well-performing stocks since 2018.
Moreover, we leveraged the opportunity to purchase a larger single-family home using cash in anticipation of needing additional space. Making a home purchase after the arrival of a baby is akin to grocery shopping while famished.
As inflation and market forces contribute to rising costs, our investments are positioned to not merely keep pace with inflation, but consistently outperform it year after year.
Personally, I relish the challenge of maintaining financial stability in one of the nation’s costliest cities. Should we relocate to Honolulu in Fall 2022, the cost of living there will seem comparatively affordable. Naturally, I hope our son secures admission somewhere.
It’s empowering to take advantage of affordable debt to enhance our standard of living. The parallel satisfaction arises from eliminating debt and achieving financial freedom. When the time arrives for you to step off the treadmill of income dependence, aim to be debt-free.
Without debt, life becomes notably simpler.
Alternatives for Real Estate Investment
Given my belief in the potential 25% upside in the U.S. median home price, real estate investment remains a pivotal element of my wealth-building strategy. A means to invest in real estate nationwide is through real estate crowdfunding.
If a property’s down payment remains elusive, managing real estate feels burdensome, or you’d rather not tie up liquidity in physical properties, explore Fundrise. Fundrise offers tailored real estate funds for diversified exposure and diversification.
For accredited investors seeking specific commercial real estate ventures, CrowdStreet is an excellent choice. Focused on real estate opportunities in 18-hour cities with lower valuations, higher cap rates, and robust demographic shifts, CrowdStreet offers diverse real estate prospects.
Both platforms offer complimentary sign-up and exploration. As part of my strategy to diversify away from San Francisco real estate, I’ve invested $810,000 in 18 distinct real estate crowdfunding ventures across the nation.
Readers, do you harbor optimism regarding housing due to the astonishingly low minimum qualifying income for home ownership? If so, what degree of additional price appreciation do you foresee, and within what timeframe?