For the average Joe wanting to buy a home, they’re more and more often going to have to be earning better than average wages in order to afford one.

It’s not chump change either. We’re talking $10,000 to $20,000 more in earnings than the typical household.

Housing prices have already been spiking in recent years as buyers battle over a limited supply of homes in northeast Indiana. Demand remains high, but with little new development over the past two decades, that leaves a crunch for available housing for the people who want it, driving up prices.

Combined with low interest rates making borrowing cheap and with builders facing higher costs and building more expensive models, prices continue to rise.

That means buyers are having to come to the table with more financial firepower behind them if they want to get into their own home.

There’s already a gap between the median income of homeowners with a mortgage and the median income of the total population, showing that people who own homes are typically earning above average compared to everyone else.

That disparity exists in all 92 counties, ranging from about $8,700 at the lowest to more than $37,000 in Monroe County, the home of Bloomington and Indiana University.

Locally, the median household income for homeowners with a mortgage ranges from about $73,000 per year in Noble County to almost $79,000 in Allen County.

The gap between the median household income for the county as compared to median income of homeowners is the lowest in LaGrange County, where homeowners earn $9,054 more than the typical household, according to U.S. Census data.

The gap is $12,738 in Whitley County, $15,036 in Noble County, $18,901 in Steuben County, $19,416 in DeKalb County and $21,732 in Allen County.

Part of the explanation for the gap may come down to the definition of “household” as used by the Census Bureau. “Households” are determined by unique residences, not by how many people are living inside them.

For example, a single person living in an apartment is a “household,” as would be an unmarried couple living together or a married could with four children.

Part of the disparity may lie in the difference in demographic groups — county median incomes would be based on all households from single youngsters through families and senior citizens. Home-owning households with a mortgage, however, is narrower and might be more likely to have two or more people inside of it, which would show higher earnings if a higher percentage of those households are dual-earners as compared to the population as a whole.

That being said, recent trends in housing aren’t helping close a gap and are likely making it worse as sharply spiking prices are forcing those looking to purchase or build a home to come to the table with significantly more money than they might have needed even five years ago.

“They’re having to come in exceptionally strong,” said Todd Stock, broker owner of RE/MAX Results, of current conditions in the housing market. “Homes are selling at 100% (list price) or more. Buyers aren’t negotiating with sellers at all or offering over list price. They’re waiving contingencies, buying without home inspection.

“I’ve not seen anything like this in my career,” Stock said.

Stock said housing is in such high demand that buyers are even buying on an “appraisal gap contingency.” Getting an appraisal is a normal part of the home buying process, allowing a bank to ensure that the property they’re lending you money to buy is worth what you’re planning to pay for it.

Even in situations where the appraisal comes up short of the list price, buyers are offering to cover the overage out of pocket, extra cash that can add thousands more to their upfront costs.

Rising costs to buy or build by necessity drive up the foundational earnings homebuyers have to have.

The question “how much house can I afford?” isn’t a simple one to answer and will vary from person to person. There’s no clear translation to say that if you earn $XX,000 per year, you can afford $XXX,000 house.

Lenders typically will evaluate a buyer’s mortgage capacity on a debt-to-income ratio of 28%, meaning your housing costs shouldn’t exceed 28% of your monthly income, while also considering that debt payments of all kinds — including your new mortgage — should generally fall under 36% of your total monthly income.

For example, a $250,000 house — which is where prices on new construction have been tending to fall in recent years — could run you around $1,500 in housing payments with taxes and insurance.

However, that’s if you come to the market with a 20%, $50,000 down payment — accumulating that kind of cash into savings is an increasing challenge for young homebuyers.

Using the 28% debt-to-income ratio, a $1,500 housing payment is going to require an annual household income of more than $64,300, higher than the median income in any northeast Indiana county.

If you’re coming to the market with some debt — student loans, car payments, credit cards, medical bills, etc. — buyers are going to need to come in with even more annual earnings to get the home they want.

That can be a tall order for buyers in their 20s or 30s looking to get into their first home.

“They have to be prepared. They have to have their finances in order. They need to be prepared to be as strong as they can. They need to be prepared to move quickly,” Stock said. “If they have car payments, student loans, any kind of credit card debt, it’s putting pressure on what they can buy.”

National interest rates are also on the rise as the Fed tries to tamp down inflation by making money more expensive. Rock-bottom interest rates in recent years have been part of the fuel mix that has made the housing market so over-hot in recent years because borrowing was cheap.

As the money supply tightens and borrowing becomes more expensive, that’s also going to clamp down on what buyers are able to afford, as more of their monthly payment is going to eaten up by interest and reduce the list price they can go after.

Right now, demand has surged again as potential buyers who were sidelined by the difficult market have jumped back in to try to get a home before mortgage rates climb any higher. High demand and a continuing short supply of available homes are again causing upward pressure on prices.

All things combined, Stock said that’s caused a phenomenon where buyers can’t just shop based on list price.

Because homes sell so quickly and because sellers are getting multiple offers including those at or above list price, possible with other cash perks, buyers often have to look at homes under their budget, because the reality is often that a house listed at budget is now over budget when the final offer gets accepted.

“If they can afford a $200,000 home, they may need to be looking at homes listed at $180,000 or $185,000 so they can be aggressive enough,” Stock said.
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