Research Question:

Being able to buy a home is one of the biggest aspirations for most people in the United States. In fact, according to a survey conducted by NerdWallet, “an overwhelming majority of Americans (91%) would like to own at least one home in their lifetime”.

However, concerns have been rising for a good number of years now about the decreasing affordability of the market compared to income.

One of my own personal goals in life is to buy a home within the next 5 years and out of curiosity, I asked myself the question “How has home buying affordability changed over the years in the United States?”.

Audience:

The audience for this project can be quite broad. This can help real estate market analysts, people involved in public policy and generally anybody with an interest in trends within the real estate market, particularly in seeing how affordability has changed over the years.

The Data:

For this project, I utilized data found on several US government agencies like the U.S. Census Bureau, Federal Reserve and U.S. Department of Housing and Urban Development, merging separate datasets to create one best suited for the analysis.

The main information that I needed was the median annual household income, median home sale price and mortgage rate. I was also able to find income data broken down for race and region and home sale prices for the different regions, allowing for a deeper dive than I initially sought.

The best indicator of home buying affordability is to compare median household income to the median home sales prices. The higher your income compared to the price of a house, the better your chances of being able to afford to buy and vice versa.

However, more than the total price, since most homebuyers do get a mortgage, I calculated the median down payment for a home calculated as 20% of the price (generally and widely accepted percentage for down payment by lenders in the United States).

The second important factor was to investigate how easier or difficult it has become to qualify for a mortgage. While many factors go into consideration for mortgage eligibility by a lender like credit score, an important one is a person’s ability to make monthly mortgage payments.

Most lenders use what is called the 28% rule meaning that your monthly mortgage payment should not exceed 28% of your monthly income. Since I had the average mortgage rates for every year, using the median home sale price and condition that 20% down payment can be met, I calculated the average monthly payment for a standard 30-year loan.

Visualizations:

I have made 5 visualizations in total:

• The first is a bar chart of Median Annual Household Income & Median Down Payment (Standard 20%) over the years.
• The second is a bar chart of Average Monthly Mortgage Amount & 28% Median Monthly Income over the years.
• The third is an area chart of Median Down Payment (Standard 20%) & Median Annual Household Income by Race.
• The fourth is a heat map chart of the ratio of Income to 20% Down Payment by Region over the years.
• The fifth and final is a map of the ratio of Income to 20% Down Payment by Region for a particular year to be use for comparison between regions during a particular year.

Findings & Explanation:

The first visualization shows that it has indeed been becoming increasingly difficult to be able to afford to buy a house in the United States. Things have been becoming bad since 2004 and while the 2007-2008 financial crisis temporality reset the trajectory for a few years, housing prices have been increasing much faster when compared to income growth.

Although that is bad news, surprisingly, it has become more easier to qualify for a mortgage over the years and the general trend so far is that it will continue getting easier.

This phenomenon happens due to lowering mortgage rates over the years with 2021 showing a historic low for mortgage rates. Unfortunately, just like all good things, this did not last since the current year saw mortgage rates soaring.

Thanks to the additional data I found, I was able to dig deeper into the question.

The third visualization helped me realize how home buying affordability is, quite clearly, a racial issue. It is disproportionately more difficult for Black Americans and Hispanic Americans than White (non-Hispanic) Americans to be able to afford to buy a home. Asians on the other hand are performing the best.

This stark difference draws from the fact that income by racial groups is unfortunately significantly different in the United States.

The fourth and fifth visualizations provide the final insight which is that affordability is also a regional issue. The Midwest followed by the South are the best regions to be able to afford to buy a house with median income and the Northeast and the West (respectfully) are the worst.

The data shows that for the Midwest and South, median income is yet to be overtaken by a 20% down payment on a house while for the Northeast and the West that has already happened almost two decades ago – a quite significant and growing difference.

Limitations, Improvements & Potential

There are several limitations for the scope of this project.

Firstly, credit score is an important issue when it comes to qualifying for mortgage and for buying a house. However, that factor is not encoded into the analysis made for this project where I have considered that the average person will have a decent enough credit score to qualify for an average mortgage rate.

Another issue, while not a limitation exactly, is that I have for the purposes of ease, fixed the down payment at 20%. Of course, a first-time homebuyer can put a much lower down payment but, in that case, on the other hand, it would make it more difficult to qualify for a standard 30-year mortgage as you are now taking a larger loan which makes the 28% income eligibility requirement more difficult to fulfill.

An important element left out of the analysis that could potentially be studied is how the trend of first-time homebuyers has changed as household income changed over the years.

Unfortunately, while I could find data on home ownership percentage, I could not find it for first time home buyers. Since the ownership data also contains people who had already owned a house or inherited one, it will not help in this particular study.

A nice addition for the region-based study would be if I were able to study it at a state level showing an even deeper understanding of how things have changed and continue to change at a more microscopic level.