Reno households need $80,000-plus salary to afford median house

Getting a slice of the American dream in Reno is going to cost you more as a homebuyer.

For the average household that carries a typical amount of debt, securing a mortgage for a median house in the Biggest Little City will require a yearly income of more than $80,000, a Reno Gazette Journal analysis found.

The amount puts homeownership out of reach for a huge chunk of single-income households as well as a number of two-income families. While home prices in Reno-Sparks skyrocketed in the last few years after bottoming out at $135,000 in 2012, wages have failed to keep pace.

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In 2016, the Census Bureau pegged the median household income in Reno at $48,815. The Bureau of Labor and Statistics, meanwhile, says the average annual wage in the Reno metro area is $46,330, an increase of about 8 percent in the last five years.

In contrast, the median price for an existing single-family home in Reno-Sparks hit an all-time record of $375,000 in March, according to the Reno/Sparks Association of Realtors. In the city of Reno, the median price for an existing single-family house is even higher, posting a new record of $400,000 in March.

The amount has since gone down to $386,000 in April but still remains above the old high set during the housing boom in 2006 when the median price reached $380,000. The current median price is not adjusted for inflation.

For residents, the sharp increase in prices compared to slower-rising wages means less affordability. To put Reno-Sparks’ numbers in perspective, the median price for an existing single-family home in Sacramento County in February was $330,000 — lower than the Reno area — according to real estate data firm CoreLogic. The average annual salary, meanwhile, is at $55,000, which is 19 percent higher than Reno’s.

The affordability issue in Reno is especially dire for younger first-time homebuyers, said Cory Henderson, branch manager for Mann Mortgage in Reno.

“Our price points are high and we have rising interest rates, so that’s eroding consumer buying power,” Henderson said.

Debt vs. income

For every homebuyer, the ability to buy a house boils down to two things: how much you owe and how much money you make.

The debt-to-income ratio is the standard used by lenders to determine how much house an applicant can afford. When the housing market collapsed during the last recession, for example, one factor cited was the use of creative financing terms that essentially ignored traditional debt-to-income requirements. At the time, several mortgage lenders approved borrowers for loan amounts that were far higher than what they could realistically afford based on their income and debt.

In determining the proper percentage of debt to income, lenders calculate two versions of the ratio. One is called the “front-end ratio,” which only looks at the housing expenses related to the mortgage alone. This comprises the total house payment, including the mortgage principal, interest, taxes, homeowners association dues and — for borrowers who do not make at least a 20 percent down payment — primary mortgage insurance or PMI.

Since the passage of the National Housing Act of 1937, the “30-percent rule” has been adopted as the standard for how much of a household’s income should go toward its housing expenses. A household that pays more than 30 percent of its income toward housing is considered to be burdened and no longer able to comfortably afford its housing expenses.

In addition to the front-end ratio, lenders also look at a second number known as the “back-end ratio.” This number looks at all of your debt and total expenses in addition to the mortgage costs.

“It’s your house payment plus all obligations appearing on your credit report,” Henderson said.

The accepted percentage of debt in relation to income changes depending on the type of loan you are applying for. Below are some examples of the maximum ratio for several popular mortgage programs. Note that some have variations in what income or debt they factor into their calculations. The Veterans Affairs mortgage program, for example, also looks at things like residual income, child care and house maintenance costs, Henderson said.

• Fannie Mae and Freddie Mac: 50 percent for an owner-occupied house.
• Federal Housing Administration (FHA): 56 percent.
• Veterans Affairs (VA): 50 percent
• Rural development, USDA: 43 percent.

Using the numbers above, in order to be approved for a Fannie Mae or Freddie Mac loan, your total debts — including car loan, credit card and student loan payments —can’t exceed half of your total income.

Mortgage examples

To get an idea of how much your annual salary should be to afford the median house in Reno, we looked at two mortgage examples. Both assume an interest rate of 5 percent and a 20 percent down payment in order to avoid paying primary mortgage insurance.

The first example involves a fictional loan based on the median home price, which was at $387,250 as of May 22, according to Henderson. This example assumes that the applicant has zero debt.

With a 20 percent down payment, the loan amount gets reduced to $309,800. This equates to an estimated monthly payment of about $1,718 per month. Assuming additional payments of $260 a month for escrow, taxes and insurance plus a back-end ratio of 45 percent for debt to income, you’re looking at a required annual income of $52,700 in order to afford the median single-family house in Reno, Henderson said.

Such an example, however, would be rare.

“How many people out there really have zero debt?”  Henderson said.

After factoring in the typical debt load for many homebuyers, the required annual income can exceed $80,000 for the median Reno house.

To demonstrate, Henderson provided a second example based on a real-life loan that he is working on for a local couple. The mortgage is for a $400,000 house in the Reno area.

By using their savings and a gift from a family member, the couple was able to put a 20 percent down payment on the house, lowering the loan amount to $320,000. Unlike the earlier example, however, the couple has some debt obligations. These include $600 a month toward a car loan, more than $500 a month on student loans and nearly $400 a month for credit cards. Add payments toward the house and the total debt comes up to about $3,259 per month.

“This is actually a more realistic scenario for what most younger first-time or even second-time homebuyers are looking at,” Henderson said.

Using the same 45 percent total debt to income ratio, the couple will need to have a combined salary of about $7,241 per month or $86,892 per year. Although still not as bad as the Bay Area, it’s still a historically high number for Reno, Henderson said.

Barring a recession, a decline in the job market or a notable increase in housing inventory, industry insiders and groups such the Reno/Sparks Association of Realtors expect prices to essentially remain within this new threshold and see steady increases.

For Reno residents, good-paying jobs will be the key, Henderson said. Ideally, you want a housing market that is steady instead of one marked by sharp swings in either direction.

“A robust jobs market directly supports the real estate market,” Henderson said. “If we produce nice-paying jobs, then that will keep our prices stable. I wouldn’t expect prices to dip far below this point if the job market stays strong.”