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Palo Alto is now the second-least affordable U.S. city to buy a home, according to a new report, which tracked housing affordability by dividing median home prices by the median annual household income for 380 cities across the nation.
The Cities With the Highest Home-price-to-income Ratios study from Construction Coverage shows the divide between home prices and household incomes has grown wider apart in Palo Alto than any other city – except for Newport Beach in Southern California.
Palo Alto price-to-income ratio
- The median home price in Palo Alto is $3,413,984.
- The median income for Palo Alto households is $179,707
- The city’s price-to-income ratio is 19, which means homes cost 19x more than the median household income.
- In comparison, the national price-to-income ratio is 4.7.
- Palo Alto has the second-highest home price-to-income ratio in the U.S.
According to the report, the median home price in Palo Alto increased by 10.5% over the past five years, and now sits at $3.4 million. Meanwhile, the median income for Palo Alto households is $179,707 — resulting in a price-to-income ratio of 19. This means the average Palo Alto family must invest 19 times their annual household income for the purchase of a home.
Newport Beach, which has a median home price of $3.2 million and a median household income of $127,353, topped the list with a price-to-income ratio of 25.4.
Of the 20 U.S. cities with the highest home-price-to-income ratios, all are in California – including Sunnyvale, with a ratio of 11.8 ($2 million vs. $169,781) and San Jose with a 10.5 ratio ($1.4 million vs. $133,835). For the Midpeninsula region specifically, Palo Alto is the only city included in the study.
Statewide, California has an 8.4 ratio, just below Hawaii, which is the least-affordable state at 9.1.
By comparison, the national price-to-income ratio sits at 4.7. As a rule of thumb, many financial advisers recommend that first-time homebuyers look for a home that is not more than five times their annual household income, according to Fidelity Investments.
Housing costs outpace wage growth
According to the report, the rate of growth of median income has trailed behind that of home prices for at least the last two decades.
From 2000 to 2022, the median annual household income in the U.S. increased by 77.6%, from $41,990 to $74,580, while the median home price nearly tripled — a 170% increase — from $123,086 to $332,826, according to data from the U.S. Census Bureau and Zillow. On an inflation-adjusted basis, household incomes increased by just 4.5% since 2000, while home prices increased by 59.1%, the report reveals.
Much of the rise in median home prices has occurred following the pandemic, with the cost of homes sold in the U.S. skyrocketing by more than 40% since 2020, according to the report.
Why high ratios matter
High price-to-income ratios are an indicator of declining homebuyer affordability. The failure of wages to keep up with housing prices can make housing costs even more expensive in real dollars, the report states.
Many states, including California, that saw home prices soar in recent years are now among those with the widest gaps in home price-to-income ratios – along with the highest home prices and long-running issues with affordable housing.
In California, housing affordability has dipped to its lowest level in 16 years, according to a recent Traditional Housing Affordability Index report from the California Association of Realtors. Less than 1-in-5 Californians earned the minimum qualifying income needed to purchase a median-priced home in 2023, down from just over 1-in-5 from 2022.
At a local level, San Mateo and Santa Clara counties require the highest minimum incomes in the state for a median-priced home, according to the Affordability Index report. San Mateo is the state’s least-affordable county, where homebuyers need a qualifying minimum income of more than $518,400 annually to afford the market’s median-priced home of $1.938 million. Only 17% of homebuyers could afford to purchase a home, according to the report.
In neighboring Santa Clara County, households need to earn $468,000 annually to afford the market’s median-priced home of $1.75 million. Only 18% of homebuyers could afford to purchase a home, according to the report.
Construction Coverage conducts research relevant to the construction industry. Senior researcher and data journalist Jonathan Jones compiled information for the “Cities With the Highest Home-price-to-income Ratios” study.