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Key Takeaways
- A down payment on a house and the first year of mortgage payments now costs twice as much as a typical household’s average annual income, up from between 90% and 120% in 2000, a new analysis found.
- The surge in housing costs in recent years has squeezed household budgets even as overall wages have increased, hitting lower-income households especially hard.
If you live in a large city, there’s a good chance you’d need to spend nearly twice your annual income in the first year alone to become a homeowner.
That’s according to an analysis by economists at Goldman Sachs, who found that if you’re a homebuyer in a large metro area—or if you’re in the lowest fifth of earners—a down payment on a home plus the first year of mortgage payments will cost between 160% and 200% of their income. A generation ago, in 2000, that was much easier to save for, at 90% to 120%.
And renters aren’t off the hook when it comes to housing costs: rent now eats up 32% of income on average, up from 27% a quarter-century ago. And for the bottom quintile of earners, rent costs 55% of their income.
What This Means For The Economy
This phenomenon heightens wealth inequality because homeownership is a primary way Americans can build assets. Over time, reduced housing mobility can also limit access to better jobs and schools, which weighs on consumer spending, labor market efficiency and long-term productivity.
The analysis of the breakdown of home affordability, by economist Elsie Peng, highlights why the cost of living has become such a hot topic in politics and financial news, even as most household incomes have climbed in recent decades after adjusting for inflation.
Surging housing costs are a problem even if overall living standards are higher. That’s because they directly affect people’s ability to improve their job prospects and educate their children, Peng contends.
“Owner-occupied housing is the primary way that many households, especially low-income households, save and build wealth,” she wrote. “In the U.S., neighborhoods offering high-quality public schools and other public amenities are predominantly owner-occupied. As a result, being unable to afford a home in these communities also means higher barriers to good schools, good jobs, and social mobility.”
