Home Loans

LendingTree Reveals the Most Stretched Homebuyers in America

New LendingTree study ranks cities by how far borrowers go to buy a home.

Home prices continue to reach new highs, with the most recent data showing prices for existing homes at a median of $276,900 in June; new homes are even more expensive at a median of $302,100. The annual increase in home prices has been outpacing income growth since 2012. As a result, homebuyers have been stretching more and more to purchase their dream homes. Low interest rates have masked this to some extent, as they have subdued the monthly payment, but the recent increase in interest has reduced this mitigating factor.

A well-known rule of thumb says that the home price should not exceed three times the buyer’s annual income. When a mortgage is used to buy a house, the ratio of amount borrowed to income is the extent to which a borrower is leveraged. In this study, we compared leverage ratios across cities to see where borrowers are stretching the most to purchase a home.

We used Home Mortgage Disclosure Act (HMDA) data that includes over 7 million mortgages originated in 2017 to calculate the leverage rate of borrowers in the 50 largest cities in America. The median amount borrowed was divided by the median borrower income for all purchases in the HMDA database for 2017.

Historical data shows that nationally leverage ratios increased from 2.30 in 2014 to 2.56 in 2017 as home prices rose faster than incomes. To rank the cities, we calculated leverage ratios that show how the median homebuyer in each city fared. However, each borrower is unique and their home buying capacity depends on additional factors including credit scores, other debt currently held and down payment. LendingTree helps individuals track the value of their home and the amount of leverage they have while also accessing tools to manage their credit.

Key findings

  • California is known for its high home prices and high incomes. Unfortunately, the tech boom is not enriching everyone with cash, and 6 of the top 10 cities are in the Golden State, including the top four (Los Angeles, San Diego, San Francisco, and San Jose).
  • Los Angeles leads the way for stretched buyers, with the median homebuyer with a mortgage borrowing 3.75 times their annual income.
  • San Diego has similar income to Los Angeles, but cheaper homes give it the second highest leverage ratio of 3.62.
  • Home prices are much higher in the Bay Area cities which rank 3 and 4 for stretched borrowers, but higher incomes provide some relief and leverage ratios are 3.52 and 3.50 for San Francisco and San Jose.
  • The more affordable cities are clustered in the Rust Belt and southern U.S. states. Pittsburgh and Cleveland have the lowest leverage ratios at just 2.00 times annual income.
  • Houston is the largest city in the bottom 10 and has the highest loan amounts of the affordable cities. High incomes driven by the energy and health care sectors helps it to a benign leverage ratio of 2.17.

The Most Stretched Homebuyers in America

#1 Los Angeles
Leverage ratio: 3.75
Median mortgage amount: $461,000
Median borrower income: $123,000

#2 San Diego
Leverage ratio: 3.62
Median mortgage amount: $442,000
Median borrower income: $122,000

#3 San Francisco
Leverage ratio: 3.52
Median mortgage amount: $845,000
Median borrower income: $240,000

The Least Stretched Homebuyers in America

#48 Buffalo, N.Y.
Leverage ratio: 2.03
Median mortgage amount: $136,000
Median borrower income: $67,000

#49 Pittsburgh
Leverage ratio: 2.00
Median mortgage amount: $152,000
Median borrower income: $76,000

#50 Cleveland
Leverage ratio: 2.00
Median mortgage amount: $142,000
Median borrower income: $71,000

Methodology
To determine the cities with the most leveraged homebuyers, LendingTree looked at Home Mortgage Disclosure Act (HMDA) data. HMDA requires lenders to report their origination activities every year. From this HMDA data, which represents over 7.3 million mortgages originated in 2017, the median amount borrowed was divided by the median income for all purchases in the HMDA database for each city as defined by the Core-Based Statistical Area (CBSA). The analysis uses figures accessed on July 18, 2018.