Home Price to Income Ratio: How Much House Can I Afford?

When buying a home for the first time, you have to consider various factors. These include your existing debts, prevailing mortgage rates, and the anticipated growth in your household’s income. All these can influence whether you should aim for a higher or lower home price range. To refine your budget and understand your affordability better, it’s beneficial to understand the home price to income ratio in your area.

What is the home price-to-income ratio?

The home price-to-income ratio is a financial metric used by experts to compare the affordability of housing relative to income levels in an area. It measures how much of a household’s annual income is typically spent on housing costs.

A high ratio suggests that homes in the area are relatively expensive compared to the income levels of residents. This could indicate potential affordability challenges for homebuyers. And, may signal a housing market where prices have outpaced income growth.

The ratio is calculated by dividing the median home price in a city by the median household income. For example, if the median home price is $300,000 and the median income is $75,000, the ratio would be 4. So, it would take four times the average income to afford a median-priced home.

Why is home price to income ratio important for home buying?

Homeownership means having a place to call your own, building up home equity over time, and establishing roots for the future. However, before committing to buying, it’s important to carefully consider whether it’s the right financial and personal choice for you. Especially, given today’s high mortgage rates. Once you’re confident about buying, the next step is figuring out how much house you can afford. And for that, you need to consider your current household income.

The house cost-income ratio is important because it provides insight into the affordability of housing in a particular area. It helps policymakers, economists, and home buyers assess housing market conditions and understand the financial burden, if any.

How does the house price-to-income ratio impact homebuyers?

Various factors can influence the ratio, including supply and demand dynamics, local economic conditions, interest rates, housing policies, and demographic trends.

For homebuyers, a high ratio may mean that it’s more challenging to afford a home. That is to say, it requires a larger percentage of their income towards housing costs. This could lead to financial strain and limit homeownership opportunities for individuals and families.

Why are home prices so high?

Several factors contribute to high home prices. Firstly, there’s the imbalance between supply and demand. Many areas face a shortage of available homes due to limited land for development and zoning regulations. As the population in the United States continues to grow, the demand for homes remains consistently high. However, the availability of land for new home construction is limited, leading to constraints on building new homes. This scarcity of land and growing urbanization results in price growth for existing single family homes and apartments over time.

The interest rates on home mortgages set by central banks also play a role. They may make borrowing money cheaper or more expensive. A low rate may encourage high housing demand.

Moreover, construction costs, including labor and materials, have risen over time, making new homes more expensive to build. This in turn affects the overall real estate market.

What do the experts say about home price to income ratio?

Experts have discovered that the gap between home prices and income has led to a house-price-to-income ratio that is much higher than what is ideal. The average house-price-to-income ratio across the country is now 5.8, which is more than double the recommended 2.6 ratio.

This means that buying a home is actually 5.8 times the median household income, making it harder for people to afford homes nowadays.

Since 2000, home values have skyrocketed by 162%, while income has only risen by 78%, illustrating a significant gap between the two. House prices have surged at a rate double that of income since 1985 and 2.1 times faster since 2000.

To afford an average home priced at $433,100, Americans would need to earn about $166,600 per year. However, the median household income is only $74,580. This is just 45% of the amount experts recommend to afford a median-price home.

Does any U.S. city have a good home price to income ratio?

In 2021, only six out of the 50 largest metropolitan areas in the United States had a house-price-to-income ratio that met or fell below the recommended 2.6. These included Pittsburgh at 2.2, Cleveland at 2.4, Oklahoma City at 2.5, St. Louis at 2.5, Birmingham at 2.5, and Cincinnati at 2.6.

However, in subsequent years, previously affordable cities have experienced increasing market pressures. By 2023, none of the 50 largest U.S. metros could maintain the ideal home-price-to-income ratio.

What is the current home price to income ratio in U.S. metro cities?

Notably, none of the 50 most populous metros in the U.S. meet or fall below the recommended ratio of 2.6. Pittsburgh boasts the lowest home-price-to-income ratio at 3.2, followed by Buffalo and Cleveland at 3.5 each. Conversely, the least affordable metros for housing are primarily in California, with San Jose at 12.1, San Francisco at 10.4, San Diego at 9.5, and Los Angeles at 9.

Last thoughts

Owning a home has always been a desirable investment due to its ability to provide various economic advantages. And it includes the chance to create wealth that can benefit future generations.

Unfortunately, the dream of owning a home in America is becoming harder to reach as home sales prices have increased much faster than incomes in the last twenty years. A shortage of available homes and low mortgage rates in the past boosted the housing market and drove prices up.

So, if you are planning to buy a house, you’ll need to meticulously assess your finances and income before proceeding with any formal offers on a property.

What is the average home price to income ratio in the U.S.? was last modified: February 7th, 2025 by Ramona Sinha

Written by Ramona Sinha. February 10, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.