The Income Gap To Affordable Housing
One of the biggest decisions you can make financially is whether to buy a home or not. Additionally, where you live will have a huge effect on whether affordable housing is available and on how much you make in your respective field.
I’m always on the prowl for cool data, and I found some interesting data about home affordability. This analysis claims to show the salary you need to afford the average home in your state. Their analysis uses home price data from Zillow, and then Zillow’s mortgage calculator to figure out monthly payments. They also used local market interest rates, although those change a lot and have been going up.
The key piece of information they used to get to the salary number is the advice that financial advisors commonly recommend – the total cost of housing should take up no more than 30% of one’s gross income.
So they crunched the data on what salary is needed to buy the median priced home in each state, but they failed to take it to the next obvious level. They didn’t compare it to the actual median incomes in these states! That’s why I’m here 🙂
But before I get out my mapping flux-capacitor, let’s look at how home prices and salaries have been fairing over the years.
The median income in America in 2016 was $59,039. (charts are interactive)
At the end of 2016 the median sale price for a home was $310,900.
To me, those numbers seem pretty darn incongruent. In other words, if I were making $59,000 a year I would definitely not be considering a $310,900 house. Is that just me? I was making about that same salary when I bought my home, and I was even a bit nervous buying a $200,000 house.
So let’s do some quick math on the charts above. The salary chart only goes back to 1985 so we’ll use 1985 – 2016 as a 31 year window.
Income And Home Price Increases
Median income increase from 1985 to 2016 – (59,039 – 23,618) = 35,421 / 23,618 = 149% increase.
Median home sale price from 1985 to 2016 (I used 4th quarter number) – (310,900 – 86,800) = 224,100 / 86,800 = 258% increase.
Median home prices have clearly gone up at a faster rate than median incomes. That brings us back to the map from howmuch.net.
Mind The Gap
So the meat of the matter is, how much is the gap between the actual median income for each state, and the income it takes to buy the median priced home in each state?
I have one small problem in doing that analysis – the howmuch.net analysis is based off current home prices, and median income data by state has not yet been released for 2017 by the BLS as I write this. I only have median income by state for 2016, so they should be higher by now. (they have released wage data up to May 2017, but that’s not the same)
So here’s how I’m adjusting for that. Nationwide, the median income went up 5.32% from 2014-2015, and 4.46% from 2015-2016. That’s a 4.89% average.
Additionally, the howmuch.net data includes 2018 home prices up to April, another 1/3 of a year.
So I’m using the 4.89% multiplier to get the 2016 median incomes to 2017 levels, and then using another 1.62% (which is 1/3 of 4.89%) to approximate them to April 2018, Capeche?
Any professional statistician reading this just choked on their Shirley Temple (I can see statisticians drinking those…), but it’s my blog and I think that’s a mathematically reasonable way to get past the issue. (*statisticians, please use the comment section to tell me a better way. Please use English).
Yes, I’m making my own secret-sauce formula to estimate current median incomes by state as of April 2018, but I bet you when the real data comes out they’ll be darn close. So there.
I present to you the median income by state as of April 2018.
That gives me what I need to do the difference between the income needed to buy a median priced home, and the actual median income for each state. With some simple math and some mapping magic, I done created this….
In the map above, states colored a shade of green have median incomes higher than the salary needed to purchase the median priced home. States colored yellow or a shade of red have median incomes below what’s necessary to purchase the median priced home in their respective state. As for the labels, black is good, red is bad.
As always, seeing things on the map reveals patterns. Look at that nice homogeneous area of green colors in the Upper & Central Midwest, which actually extends all the way to New Jersey in the East. In the lower 48, besides Alabama, VT/NH, and Connecticut, the greens are all connected. A continuous zone of ‘affordable’ housing.
Also notice the yellow’s and red’s lean to the South and West, with the West being especially red.
So it’s an even split – there are 25 states with median incomes above the level needed to buy the median priced house, and 26 below (since I’m including D.C.). Here are the top 10 states where the median income exceeds the amount needed to buy the median priced house by the most.
| State | Difference |
| Michigan | +$20,053 |
| Ohio | +$19,142 |
| Iowa | +$18,628 |
| Kansas | +$17,393 |
| Indiana | +$17,230 |
| Pennsylvania | +$17,037 |
| Missouri | +$16,441 |
| Wisconsin | +$13,678 |
| Alaska | +$13,433 |
| New Hampshire | +$12,845 |
And here are the bottom 10 states that have median incomes that fall well under what’s needed to buy the median priced home.
| State | Difference |
| Hawaii | -$76,634 |
| Washington, D.C. | -$62,781 |
| California | -$49,092 |
| New York | -$26,235 |
| Colorado | -$24,984 |
| Massachusetts | -$24,292 |
| Oregon | -$24,128 |
| Florida | -$15,812 |
| Montana | -$14,684 |
| Nevada | -$14,037 |
One thing to remember in this analysis – the howmuch.net folks used the common advice that the total cost of housing should take up no more than 30% of one’s gross income. But as smart financial warriors, we wouldn’t buy that much house now would we?
So if you adjust that down so the cost of the house takes up only 25% or even 20% of your gross income, the salaries on the howmuch.net map would be lower, and more states would be in the green category in the analysis.
Although I’m fully aware that this is simply not possible for many, especially those who make a median salary in a HCOL area like San Francisco or Washington D.C. In some of those extreme HCOL areas you might, frankly, be screwed. Geoarbitrage may well be your best option if you want to buy a home in those situations.
A little while back, Joe at RetireBy40 did a great post on housing affordability and looked at some interesting angles of the problem. Joe lives in Oregon and as you can see they’re ranked #7 on the red chart above, so he sees this routinely as someone who also rents properties.
Overall, this reinforces the importance of not maxing out your “buying power” per recommendations from “experts” when buying a house. When they say “buying power”, they usually mean “so much money that you’re really stretching things”.
Whether you buy or rent, your housing bill is likely the largest of your expenses. Save money there and you can really get ahead quick, and still have a latte or two when you want.
How Much You Make
I did a post a while back linking to a cool online tool that shows how much you can expect to make based on your major, including by state.
For instance, an accounting major can expect to earn $75,000 in Virginia, but only $61,000 in South Carolina. So where you live can affect you salary significantly.
If you’re considering geoarbitrage to help afford the cost of a home, don’t forget to do your research on the income side of things. It could be drastically different from where you live now.
I certainly hope median housing prices do not continue to increase faster than median salaries, but the overall trend isn’t good. If you find yourself wanting to buy a home but also priced out of your market, I hope the information and tools in this post can help you with your next move.
Also be sure to check out my Geoarbitrage Resources Page that has tons of great tools to help you find your perfect location.
We live in Massachusetts, sixth on your red list. In our town, single family homes usually are above $500,000. You could find old homes for $4000,000 but are very rare. What options does one have?
If we were a one income family, we would still be spending over 20% our gross income even though we bought a “cheap” house at $450,000 and we earn more than double of our state’s median income. These prices are crazy.
No doubt about it, Mass is expensive. I do like the Berkshire’s though 🙂
Moral of the story, we’re all screwed LOL! i’m kidding, i’m kidding, i like this, your point is made very clear with the maps. One of my target states to move to… down the line, is in the green! Yay me!
The state i live in now is in the yellow… so i can’t really say i have it as bad as others… Looking on the bright side 😉
Ha, awesome sauce for you!
Wow. Such interesting data. I could see this as a great resource for people looking into geoarbitrage.
Thx Doc, data is liberating!
i would like to see ny data with nyc excluded. in fact, i would like to see nyc excluded from the state! we bought our house because it was cheap at the time. i still think 150k is a reasonable price for a house but i’m a relic and a curmudgeon.
i hear ya freddy, nyc definitely skews the new york state numbers. any state with a big city will be the same. the only way to get past that would be to break down by county or zip code. i can get median income data at those levels, but the “what it takes to buy a house” analysis was only available at the state level.
and 150k is very reasonable. in DC some poeple pay that for a parking space for their condo…
California is so large, it needs a whole new post from you — in your “spare” time. One thing that jumps out to me is how we have blown WAY past the original housing bubble prices. Low interest rates make the payments more affordable, but I think you’ve factored that in by looking at the Zillow calculation part. Gotta ask one of those accountants when they sober up. Those Shirley Temples are killer.
This is a great post. This type of analysis puts a lot in perspective. For instance, my niece and her husband just bought a condo north of Seattle for $350K and it seemed overpriced to me. Especially on their music major incomes. Crazy. But somehow, Washington state is yellow, not as bad as Oregon or California. I tell you, each of the states has it’s own breakdown. The city areas are sky high and the boonies skew the data.
Very true Susan, better analysis would be by county or zip code but as I told Freddy the HowMuch analysis was only by state. I can get median income at more resolute levels but the other numbers weren’t available.
Isn’t some guy getting a proposal to break up California on a ballot? Now I’ll have to do 53 states, ugh….
Thanks for the kudos!
The median salary inside Seattle is $80,000. The average cost of a single family house is $700,000. It looks completely ridiculous…and it is. There’s lots of money from high earners and RSU holders for those down payments. And parental assistance. Talk about a growing gap!
The gap is growing indeed. In DC it’s ridiculous. I have data on renting which is a bit better. Post forthcoming in the future 😉
Wow. That really is some really impressive analysis you just did and love the color representations to drive home the points on the map.
I attribute geoarbitrage as one of the big keys to my financial turnaround (was purely by happenstance and not planned). I could easily see setting myself back a decade if I had ended up in a HCOL area.
Geoarbitrage is a powerful tool – thanks for the kind words!
This is pretty fascinating stuff but lines up well with these other maps you have created. Midwest is always coming out on top! Maybe there’s a reason for that..
I think I’ve mentioned this before but even with states there can be a huge difference between median home prices if you’re looking at the biggest city vs the rest of the state (NY comes to mind here). NY as a while shows up red, but I’d be willing to bet if you look at the rest of the state it may be a bit better due to drastically lower home prices (also lower salaries, but also something to keep in mind when considering geo arbitrage)
Yep, big cities skew the data for states. But also the boonies do too. In some states they might cancel each other out, but in states like Oregon with one big city and the rest kinda boonie, it might skew it more.
And coastal people often condescendingly refer to the Midwest as “flyover country”. Well, those Midwesterners seem to have a faster path to FI in most measures!
Let’s just say that my husband and I make an upper-middle class income, and I don’t think we can afford to buy our apartment in NYC. I mean, we could, but we wouldn’t have any money leftover to save aggressively, possibly pay for childcare, and travel. Basically, all our money would be going to the apartment. Having to be on the hook for a $600k+ mortgage is not my idea of fun!
Your chart is helpful for deciding where to move and buy a house that’s somewhat reasonable. Thanks!
You’re in NYC, like I said in the post…. sorry, but you might be screwed. Same in DC but not quite as extreme. If you read Financial Samurai he’s in San Fran and often blogs about the same situation, although he does have a house.
The separation can’t continue to grow forever in my opinion. It has to have a limit
As a statistician, I’ll say what you did looks reasonable. (And I’ve never even tried a Shirley Temple — to be fair I’m only MS, maybe that is part of the PhD ritual.) Any complaints would likely be splitting hairs that wouldn’t make much of a difference in the outcome. Now, if you really want to make it complicated without gaining much more insight, go find an economist.
I do think it’s worth noting that you’re comparing current house pricing to current income. This is particularly relevant to first time home buyers willing and able to get a job in a wide variety of locations throughout the us. Things may be more complicated if you want to compare the price of a home bought 5 years ago in an expensive state to your current income…
Overall, really interesting post. Well done.
Wow – cool! Thanks so much for commenting and reassuring me that my analysis isn’t too off base. As I mentioned to others this kind of analysis isn’t ideal at the state level, but the HowMuch.Net analysis was only available by state. It would be more ideal at county or zip-code level.
And no slight intended to statisticians on the Shirley Temple comment, I just have a strange sense of humor an sometimes go off stream of consciousness 😉
Thanks for the kudos!!
Wow, I knew geoatbitrage was powerful, but I don’t think I knew how powerful. Suddenly I’m very grateful to live in a rural area in a fairly poor state!
On the flip side, I guess I can’t blame a high cost of living if I’m not meeting my savings goals.
-Ray
It’s powerful indeed!
Ahahaha yep I spent the entire day yesterday looking at apartments and concluded that I probably can’t afford to move since insane house prices also means insane rents. I also can’t afford to stay in this city much longer. Damn you, DC!
It’s really too bad most of those affordable states have such awful winters!
It is so damn expensive here Erin, I feel for ya. I lived in Baltimore the first few years I worked down here and put up with the horrible commute. Not a good solution but money-wise it was slightly easier.
Great post. The house oruce numbers seen how to me until I realized there in us dollars not NZ. I’ve been looking at similar data for NZ.
Thank You!
Wow. My home state of California is a deep red state? That’s a first! 🙂
But yeah… seriously, it’s ridiculous in California. A house just a few blocks a way from mine is on the zillow market for $2.3 million when the owners just purchased it last year for $1.6m. I don’t know how normal folk afford to live in coastal California.
It’s like the wild wild west out here!
If I ever move out of California, I’m geoarbitraging to where the grass is GREENer!
Thanks for the information and all the maps. I am a visual person who loves geography and I love these posts 🙂
Yeah, go figure. Maybe Cali needs to be broken up into three states 😉
Thanks for the mention!
The map looks about right to me.
CA real estate is crazy. WA is expensive, but people make more money so it’s not that bad outside of Seattle area. OR is cheaper than WA, but the economy here is not as strong. The whole west coast is expensive.
I don’t know the green area very well. We really need to visit that part of the country more.
I was surprised at Oregon personally. And yes, the Midwest isn’t as bad as most “coasters” portray it.
Great analysis!
When thinking about home affordability, it is important to remember that the ten year treasury bond was ~11% in Jan 1985. In Jan 2016, the 10 year was ~2%. Unless we are paying for our homes in cash, we have to remember that interest rates going down allowed housing prices to go up. A house at 2% is a lot more affordable than 11% but prices adjusted up as mortgage rates adjusted down.
GREAT point! Money has been so cheap to borrow it does really change the game. When I bought my home rates were at 7% and I though THAT was low – it was at the time. Then they just kept going down and I refinanced the whole way.
And yes, rates actually reached about 15% in the mid/early 80’s if I’m not mistaken. Crazy to think of that!
Doing multi-year analysis like that would be complex though, so I have to do what I can. Thanks for the great comment and kudos!
If you could plot another overlay, I’d love to see the distribution of personal finance bloggers, and their penchant for home ownership v. renting. Easy to see how California’s situation influences Sam’s stuff at Financial Samurai.
As for an investing opportunity – man, Michigan is where it’s at. Lots of people are flocking to inner city Detroit to revitalize some very solid old stock neighborhoods for CHEAP. It’s crazy landscape, with a number of city blocks demolished and open field now – post apocalyptic.
Getting the location data on pf bloggers would take some serious time but I agree it would be neat to do.
As for Detroit, we’ve all seen those stories of houses for $5k. I also saw a cool story of some dude who wants to do “urban agriculture” using empty lots and building skyscrapers of crops. Urban decay can spawn all kinds of neat things in the end. Baltimore will be next… there’s no hope for my hometown, it will implode.
I still think it’s hard to get an accurate reading if you go by state alone. Take CA, LA is crazy expensive as is SF, but there is so much geography to the state and a LOT of places like farms and crappy areas which make averages a bit too crazy. Know what I mean?
I agree Tonya, aggregating by states can be deceiving in some cases, better in others. As I said to another commenter I do have median salary data by county but the HowMuch analysis (which was complex) was only available by state so I went with what I had.
But your point is a good one, analysis by county or zip code would yield all kinds of insight. Also remember that the person living in the Owens Valley with a very reasonably or low-priced house is saying the same thing “those city folks prices are skewing this analysis!!” So depending on the “balance” of urban/rural it can sometimes cancel each other out. Other times not as much.
That’s why geography is so complex 🙂
I spent two years interning as a statistician for the Department of Justice and say your methods are good enough for government work.
And go jersey. Who woulda thunk. Reckon this analysis doesn’t include the crippling property taxes?
Good enough for gubment work is what I was shooting for 🙂
Nope, property taxes not included because the HowMuch.Net analysis included just buying the home. Unless I’m mistaken, no states charge property taxes at the time of purchase, you just start paying them on your escrow as you pay the mortgage (if you choose) or a lump sum afterwards.
Excellent analysis, AF. I look at these numbers and I don’t know how people in many of our states afford homes. Mrs. Groovy and I left New York for North Carolina for precisely this reason. We could have technically “afforded” a home on Long Island. But that’s all we would have been able to afford. And Mrs. Groovy and I decided we wanted a home and a life. We owned our 2,000 square foot home outright, and because of low property taxes, our monthly carrying cost (taxes and insurance) for that home was less than $225. I don’t know what the answer is. Perhaps we need more tiny homes, more shipping container homes, more trailers, and more geoarbitrage. Meh. Does life have to be this hard?
Yep, I’ve seen your numbers on your blog and heard you on some podcasts. Long Island is insane in the brain. Thankfully there are still reasonable places to live, and despite coastal people considering much of them “flyover country” I think they’re just fine, and really smart financially.
Glad you guys found your place!
Do I read this “Affordability Index” correctly as Gross Monthly Wages minus Monthly Principal and Interest?
Yes, but the housing analysis from the HowMuch.Net folks also included a 10% down payment and they used state-based interest rates which differed. You can read about what they did on their page
Thanks for the prompt reply.
You have not conducted a “Housing Affordability” analysis by any definition.
You have ignored all income and property taxes, utilities, insurance, (grocery, vehicle), etc. All which vary by state.
In lieu of those considerations, you didn’t even bother to apply the 30% rule-of-thumb you discuss.
First off the HowMuch.net folks did indeed apply the 30% rule, I took their numbers. Read their post
Secondly, they didn’t do it by county so I can’t do it by county. I got the #’s on salary needed to buy a median home from them, and they did some analysis for that that involves interest rates etc. Perhaps you could read about that on their site?
Thirdly, adding income taxes and property taxes into the equation would require breaking out to county and municipal level. Perhaps you’d like to help with that….
Fourthly, I have no clue what grocery prices have to do with the price of a house. Or a vehicle. I have another post on the “big three”, perhaps you could read that if interested. This post is about housing and housing only as compared to income.
Howmuch doesn’t spell out their formula.
You exclude things because they’re not easy enough to gather.
You and they have colorful maps, and not much else.
We call that GIGO.
I look forward to your free analysis and content. Thanks for for playing – have a nice day!! And thanks for giving me some $ by visiting my blog multiple times 🙂
You posted the “Housing Affordability” map that has no informational value.
That has nothing at all to do with anything I do or don’t do.
Well like 10k others thought it has plenty of informational value and perhaps you could direct your ire to the HowMuch.Net folks. Or go count how much groceries affect the cost of your house
And you still didn’t answer what groceries or transportation have to do with the topic of this post, but whateva….
I think these maps make it seem like much less of a problem than it actually seems to be. If you isolated the big metro areas (SF, NY, LA, Boston) from the states, it would show the situation for most millennials. DC is not less affordable than California or New York but using the states instead of the cities lets you include all the lower-priced areas.
Yes! what you’re saying is that it would be ideal to see this analysis at the county or municipal level and I agree. The HowMuch.Net analysis was only done by state though, and they did all the math using local interest rates etc to get to the salary needed to buy a median priced home
But many urbanites forget that a huge portion of the American population is still rural or “rural-ish”. I say that because by the Census’ own definition it’s very fuzzy to categorize. This article from CityLab did a great job of laying out the problem
https://www.citylab.com/equity/2012/03/us-urban-population-what-does-urban-really-mean/1589/
The meat of the matter is in the article – “According to the Census Bureau, a place is “urban” if it’s a big, modest or even very small collection of people living near each other. That includes Houston, with its 4.9 million people, and Bellevue, Iowa, with its 2,543.
So the Census says that the majority of Americans live in urban areas but that’s crap, because they’re counting the tens of thousands of tiny “urban” areas like Front Royal VA and even smaller ones. A more accurate estimate is that 25 – 30% of Americans live in truly urban areas.
So visually I agree that the large swath of green on the map makes it seem like things aren’t too bad. But there are big cities in that green too, like Chicago, Pittsburgh, St. Louis, and Kansas City.
If I can get the necessary data by county to do it at that level I’d give it a go!
I think Chicago might be a nice place to live except for the murders and the winter.
“Murders & Winter”, what a great name for a novel!
or a band.