Estimating the Cost of a House in Tucson, Arizona MSA
If you’re like most people, you can’t afford to pay cash for a home. In 2023, 78.0% of homes purchased were financed according to the National Association of Realtors “2023 Home Buyers and Sellers Generational Trends Report.” The report shows that financing rates varied significantly by age, with 94% of buyers 32 years and younger financing. Financing rates didn’t drop much till you reached the 58 to 67 age range, which had a rate of 68%. Those aged 68 to 76 and 77 to 97 had financing rates below 50% (Figure 1). Financing rates decline with age as older buyers are more likely to use equity from a past home. Across all age groups that financed their home, the median down payment was 14%.
Figure 1: Percent of Buyers Who Financed Their Home Purchase (2023)
Home prices across the nation have increased rapidly over the past few years due to strong demand and limited supply. Home prices cooled in the second half of 2022 due to spiking interest rates. However, recent data for Tucson suggests that was only temporary, with home prices increasing by 2.9% between the fourth quarter of 2023 and the first quarter of 2024. Tucson reached a new all-time peak in the median sales price of a single-family home of $383,300 in the second quarter of 2023. That all-time peak continued to increase in the first quarter of 2024 price at $389,700 (Figure 2).
Figure 2: Median Home Price Trend
The recent increases in home prices have outpaced income gains. That coupled with increasing mortgage rates, has significantly impacted housing affordability. The MAP tracks annual housing affordability data from the National Home Builders Association back to 2000. Figure 3 highlights the quarterly housing affordability trend since 2012. Tucson reached an all-time low of 32.5% in the fourth quarter of 2023. That means that only 32.5% of the homes sold in the Tucson region during the fourth quarter of 2023 were affordable to someone earning the local median family income. Despite the low affordability rate, Tucson remained one of the most affordable regions to purchase a home compared to peer Western MSAs.
Figure 3: Housing Affordability Trend
Have you ever wondered how much house you can afford? If you spend more than 30% of your income on your housing-related expenses then you are considered housing cost-burdened. Research has shown that households that are cost-burdened have a more difficult time paying for other necessities like healthcare, childcare, education, and even food. Using five-year estimates for the 2018-2022 period from the American Community Survey, 31.4% of households in Tucson were housing cost burdened. That rate fell to 21.1% for homeowners, while 51.1% of renters were cost-burdened. Compared to peer Western Metropolitan Statistical Areas (MSAs), Tucson fared relatively well in housing cost burden rates among homeowners, as illustrated in Figure 4. Tucson’s low housing cost burden rate among homeowners was partly due to its relatively low home prices.
Figure 4: Percent of Homeowners that are Housing Cost Burdened (2022)
So, how do we determine the price of an affordable home? There are several factors that drive affordability, and they are unique to each individual. The most significant factors include the buyer’s monthly income, the amount of the down payment, and mortgage interest rates. Other factors that can vary from region to region are local real estate taxes and insurance rates. Using local area taxes and a fixed set of assumptions, we can calculate the price at which someone earning the local family income can afford to buy a house without being housing cost-burdened.
In Tucson, the local median family income in 2022 was $84,982, again using data from the American Community Survey. Compared to peer MSAs, Tucson’s median family income fell near the bottom of the range ($59,439 to $122,835). We can use each metropolitan area’s median family income to calculate the maximum amount someone could afford to spend each month on their mortgage payment without being considered housing cost-burdened. In Tucson, a family that earns the local median family income of $84,982 would need to spend less than $2,125 each month on their mortgage to avoid being housing cost-burdened (Figure 5).
Figure 5: Monthly Amount Spent on a Mortgage at The Point of Housing Cost Burden
Using the maximum amount someone could spend on their mortgage payment each month, we can calculate the price of an affordable house given a set of assumptions. Those assumptions include the amount of the down payment, length of the mortgage, interest rate, insurance (homeowners and principal mortgage insurance (PMI) – if applicable), and the local tax rate.
In 2023, the median down payment for a mortgage was 14%, according to the National Association of Realtors. For this article, we calculate two purchase prices that would be considered affordable. The first calculation is for those who put down 10%. This measure includes PMI. The second calculation is for those who put down 20% and would exclude PMI.
In Tucson, if someone earned the local median family income, puts 20% down on their home, and financed the remaining amount for 30 years using the average mortgage interest rate in the first quarter of 2024 (6.75%), they could afford to purchase a house costing up to $357,500 without being considered housing cost-burdened. That would result in a monthly mortgage payment of $2,124, which includes principal and interest ($1855), taxes ($194), and homeowner insurance ($75).
Using each MSA’s local median family income and the same assumptions, the affordable house prices varied widely among Tucson's peers. Families in Denver had the highest purchase price at $540,800, while El Paso had the lowest at $204,500 (Figure 4).
Figure 6: Maximum Purchase Price of a Home without Housing Cost Burden with 20% Down Payment
The affordable house price drops significantly if families use a down payment of 10%. In Tucson, a family earning the median income could afford to spend up to $300,300 without being considered housing cost-burdened. That would result in a monthly mortgage payment of $2,124, which includes principal and interest ($1,753), taxes ($163), homeowner insurance ($75), and mortgage insurance ($133). When compared among peers, Tucson had the fifth-lowest purchase price using these assumptions (Figure 7).
Figure 7: Maximum Purchase Price of a Home without Housing Cost Burden with 10% Down Payment
To learn more about housing affordability, housing-cost burden rates, home prices, income, and wage growth, visit the MAP Dashboard core indicators. Stay tuned for upcoming articles on housing that include trends on rental properties and prices.
