The American Dream just got a lot more expensive for first-time homebuyers.

To afford a starter home, typical first-time buyers need to earn 13% more this year than they did last year, according to a new Redfin report. In super-hot markets like Miami and Fort Lauderdale, that threshold is up 25%.

There are three reasons for this.

Mortgage rates are at their highest levels in 15 years. Prices for starter homes are spiraling upward due to lack of supply—which is, in part, because of higher mortgage rates.

Meanwhile, incomes are hardly keeping up.

Housing affordability today becomes even more appalling when you compare it to the dreaded early 1980s, a time when mortgage rates hit a record 18%.

Housing affordability today vs. 1970 and 1981

The gap between incomes and house prices has been widening slowly for 50 years, but since the beginning of the pandemic, it has become an abyss.

In 1970, it took the equivalent of 2.7 years’ worth of a typical person’s income to buy a house. By 2020, that had more than doubled, to 5.8 years.

In the last two years, the gap blew out—widening by another third. As the chart below shows, it now takes over 7.6 years’ worth of income to afford an average home.

housing affordability

Add in rising mortgage rates and Redfin says a person looking to buy today’s typical starter home would have a monthly mortgage payment of $1,610.

That’s nearly double the typical payment just before the pandemic.

Not only that, in terms of the mortgage burden, a median house today is almost as unaffordable as it was in 1981 when mortgage rates peaked at 18.39%—and more than 3x costlier compared to 1970:

mortgage burden 2

“Many house hunters searching for an affordable place to call home for themselves and/or their family are out of options, especially in more expensive parts of the country,” according to Redfin Senior Economist Sheharyar Bokhari.

Redfin notes that average U.S. wages have risen 4.4% from a year ago and roughly 20% from before the pandemic, which does not make up for the jump in monthly mortgage payments.

This means first-time homebuyers who stretch their budget to the breaking point might easily end up “house poor”—the term for having no money left over to furnish the house you just bought.

A first-time homebuyer must now earn about $64,500 to afford a typical U.S. starter home.

Redfin defines these as houses that are priced in the bottom third of the market. These, when you can find them, are going for a record $243,000 on average, up 45% since before the pandemic.

(Redfin calculates how much a starter home buyer needs to earn based on the rule of thumb that your mortgage costs should not exceed 30% of your income.)

But does affordability matter?

Even if they can afford a starter home, first-time homebuyers might not find anything out there to buy. New listings are down 23% since last year—the biggest drop since the start of the pandemic.

That is because most current homeowners have ultra-cheap mortgages; as recently as 18 months ago, you could get a 30-year mortgage at about 3.3%.

These people do not want to sell and be forced to buy a different house with one of today’s more expensive mortgages.

The seller might reap a windfall on the sale itself, but most of that extra money will go toward paying down the higher-rate mortgage over time.

So, they sit tight hoping rates will fall.

Making it worse for first-time homebuyers, almost 40% of the houses on the market are going to buyers who pay in cash; another luxury most younger buyers can’t manage.

The upside of a downdraft

The fact that first-time homebuyers are priced out of homeownership doesn’t mean they have absolutely no bargaining power.

Younger buyers are the primary driving force of the housing market. Wolf Richter, a financial analyst and editor of the Wolf Street newsletter, recently wrote:

“In fact, most of the increase in the overall homeownership rate from 2016, and nearly all of the increase since 2019, through 2022, was driven by people under 45.”

Between 2019 and 2022, the number of U.S. citizens under 44 years old who owned houses grew by two percentage points, while homeownership among Americans 45 and older was mostly flat, according to the Census Bureau.

Now that first-time homebuyers bear the sharpest increase in home buying costs on record, they might not be able to drive the housing market forward.

That’s a sound theory on paper—and something that could eventually upend the market. But for now, housing prices remain stubbornly resilient despite the headwinds.