First-Time Buyers Need an Extra $45,000 a Year to Afford the Average Home

A new study by Clever Real Estate found that first-time buyers must earn nearly $120,000 annually to afford a 10% down payment on the median-priced home of $332,494. That poses a problem for the average American household, which earns less than $75,000 a year.

Although the housing market has cooled since its peak in 2022, Americans continue to face challenges when buying a home.

With stagnant wages, soaring housing costs, and an inflation rate that isn’t falling as quickly as the Federal Reserve hoped, prospective homeowners have many hard financial decisions to make if they look to buy.

Burden for First-Time Buyers

High costs and low inventory inhibit all prospective homebuyers, but first-timers face additional hurdles.

While existing homeowners can put profit from their sold home toward a new place’s down payment, first-time buyers must rely entirely on personal savings for their 10% down. Consumers looking to make 20% down payments, a move that requires more money upfront but reduces future monthly mortgage payments, face added frustrations.

Americans would have to save $500 monthly for 11 years to afford a 20% down payment on a home priced at the United States median — around $332,494.

Debt Hinders First-Time Buyers

First-time buyers’ mounting financial obligations, like student loans and consumer debt, complicate the already frustrating homebuying process. As of March, the average federal student loan borrower carries a balance of $37,088. Consumer debt from credit cards is also on the rise, with the average borrower owing $5,875, according to Clever.

Paying off debt and affording necessities during an inflationary period doesn’t leave first-time buyers with much to put aside for a down payment.

“It’s disproportionately forcing them to rent or live with their parents or roommates for far longer than previous generations,” said Ethan Hamilton, a licensed agent with Realty ONE Group Sterling. “That late start will inevitably cost them in the long term.”

Sometimes, first-time buyers who move into a new home may find themselves “house poor,” a term used to describe those whose home purchase is beyond their financial means.

According to the popular 28/36 rule of housing affordability, a household should spend no more than 28% of its gross monthly income on housing while using an additional 8% to pay off debts.

However, Clever’s study found that affordable housing is only available to median earners in six U.S. metros: Pittsburgh, Cleveland, St. Louis, Memphis, Indianapolis, and Birmingham.

Achieving the Dream

Homebuying remains possible with planning and the right mindset, but that doesn’t mean waiting for the market to change.

“Waiting this market out is not something that is necessarily going to serve first-time home buyers,” Hamilton adds.

Awaiting an interest rate dip is tempting, but buyers utilizing this strategy in today’s market may have to compete with other buyers who also waited for lower rates. This added demand may increase housing prices.

Hamilton instead encourages prospective buyers to focus on what they can control to make their dreams of homeownership come true. That includes building their credit score and saving for a down payment by starting a side hustle or taking a second job. With more money for a down payment and an excellent credit score, buyers can often secure a better mortgage rate and reduce their monthly payments.

Hamilton urges buyers to prioritize practicality when it’s time to buy. Shoppers should seriously consider how much home they need and what percentage of their income they can spend while staying within their means.

“We live in a world where keeping up with the Joneses is a good way to get sidetracked and get you overextended,” he said. “Your income is your biggest wealth creator. If you’re spending 35% to 45% on housing, you aren’t setting yourself up to get ahead.”

The Clever study found that the most expensive home most first-time buyers can afford costs about $207,529 — 38% less than the median-priced home.

New buyers should consider their first home an investment. The average consumer buys three homes in their lifetime, and the first home allows buyers to build wealth as they wait for the second. Homeowners can grow wealth by renting to tenants to offset monthly mortgage payments or flipping a fixer-upper in a desirable neighborhood.

A first home can become a long-term income property, generating wealth for years. Work with an agent who knows the local market to find the best property to achieve this goal.

“The first home you buy, think of it as a gateway to your forever or dream home,” Hamilton said. “The more sweat equity you can add on this first one, the bigger and nicer your dream home can be in the future.”

This article was produced by Media Decision and syndicated by Wealth of Geeks.