What Buyers Can Afford to Pay for a New Home

New research shows what first time homebuyers can afford based on their income and debt levels.

After analyzing 543,000 2017 first time homebuyer transactions, the American Enterprise Institute's Center on Housing Markets and Finance found that the median price-to-household income ratio was 3.3. This means that, on average, a home’s price might be 3.3 times a household’s total yearly income. 

The Chicago Tribune reports that these numbers differ by region, from 2.3 in Pittsburgh, to an expensive 5.0 San Jose, Calif. The strenuously high ratios have been made possible by relatively lax financing options including loans with 3 percent-down options.

Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., says he's watched pricing rules-of-thumb ratios in his market area push higher for a couple of decades—from three times income in the late 1980s to four times income at the height of the housing boom in 2006. But qualifying for a specific loan amount—which sets the upper limit on what you can buy—can’t really be reduced to a ratio, he says. It's all about buyers' individual circumstances. He sees applicants with good incomes and credit but who are carrying student-loan debts requiring hundreds of dollars a month in repayments. "Student debts are killing these guys," he told me, because the payments knock applicants' DTIs beyond what's acceptable even under loosened guidelines. For debt-burdened individuals like these, there is no price-to-income ratio rule of thumb. They are out of the game.

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