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.