Zillow recently shared a fascinating study that breaks down how much you need to earn to afford a "typical home" in various cities. They used a 10% down payment and their own Home Value Index to figure out the median home price in each city. Now, I usually suggest a 20% down payment based on my 30/30/3 home-buying rule, but let’s roll with Zillow’s approach for now. Let’s look at the income you’d need to buy the median home in each of the top 50 city metros in America from 2020 to 2024.
San Jose tops the list with a whopping income requirement of $454,296 to afford a median home. On the other end of the spectrum, Pittsburgh only requires an income of $58,232. So, if you’re keen on owning a home and working with a tight budget, maybe it’s time to consider moving to Pittsburgh, Pennsylvania!
As someone living in San Francisco, I’m relieved that the cost of living here is only $339,864. That’s a significant $114,432 (or 25%) less than what you’d need to own a home in San Jose. Plus, San Francisco has a more vibrant, enjoyable, and scenic environment compared to San Jose. It’s San Francisco, not San Jose, that’s a major draw for travelers from around the world!
Now, you might remember my post titled “Why Households Need To Earn $300,000 A Year To Live A Middle-Class Lifestyle Today.” While some of you might have disagreed with my analysis, it’s comforting to see Zillow’s data backing it up. The US is a big place with a wide range of living costs. Luckily, we’re free to choose where we want to live. If the cost of living gets too high for our income, we can always move, cut back on expenses, or find more work. We’re all rational decision-makers, after all.
Despite cities like Boston, New York, Seattle, San Diego, Los Angeles, San Francisco, and San Jose requiring over $200,000 in household income to afford a typical home, I believe these cities are more affordable than they seem. Here’s why:
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Expensive cities are cheaper for fun and healthy living. For example, I pay $180 a month for a network of sports clubs in the Bay Area. I think it’s a great deal, which is why I’m not willing to cut this expense even though I’m no longer financially independent. But then, a reader from Pittsburgh told me that a private sports club with indoor pickleball and tennis would cost at least $1,500 a month there. That’s a lot of money! Who can afford that? Spending $18,000 a year on sports club membership when you only need $58,232 to afford a typical house seems ridiculous.
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Expensive cities make it easier to earn more money, increasing affordability. I’ve been thinking about moving to Honolulu, Hawaii since 2014. After retiring in 2012, I thought, “Why not move to my favorite state in America?” The great weather, tasty food, and relaxed vibe all seemed like they could contribute to a longer and more fulfilling life. But when I looked at the job market in Honolulu, I found that the pay was 40% – 60% less than what I could earn in San Francisco. Plus, I didn’t know of any appealing part-time consulting jobs in Honolulu. In contrast, San Francisco has plenty of consulting and full-time jobs that pay $100,000 or more. Today, even 23-year-old college graduates working in tech, consulting, or finance can start earning $150,000 or more annually. It makes sense that the cities with the highest pay also have the highest cost of living.
So, while living in an expensive city might seem daunting, it’s actually a great way to build wealth. You can strive to maximize your income (playing offense) or try to save as much money as possible (playing defense). Most people pursuing financial independence use a combination of both strategies. Personally, I prefer playing offense because there’s no limit to how much you can earn or how much your investments can return. Since 2009, I’ve chosen to live in New York City and San Francisco because of the many opportunities for higher earnings. This approach is like investing in growth stocks in the first half of your life.
Once you’ve built up enough wealth, you can think about moving to a cheaper city that better fits your lifestyle and income levels. It’s easier to move from New York City to New Orleans than the other way around. The potential income in an expensive city can be so high that the high cost of living becomes less of a problem.
If you live in a cheaper city, you should definitely take advantage of online income and work-from-home opportunities. More and more jobs are offering the same pay no matter where you live, so why not make the most of it?
I’m planning to keep investing in the heartland of America, where the cost of living is lower and rental yields are higher. I believe that technology will drive more Americans to move to cheaper cities over the next few decades. If you agree with this long-term demographic change, check out Fundrise. They manage over $3.5 billion in assets and mainly invest in residential and industrial properties in the Sunbelt region. If you choose to stay in an expensive city, it’s even more reason to diversify across cheaper parts of the country.
About Financial Samurai: Financial Samurai is one of the largest and most trusted independent personal finance sites, with about 1 million organic visitors a month. The site was started in 2009, and everything is written based on firsthand experience. Sam worked in finance for 13 years, got his MBA from Berkeley, and has written over 5 personal finance articles. He is the WSJ bestselling author of Buy This Not That and one of the pioneers of the modern-day FIRE movement. Join his free weekly newsletter if you want to speed up your journey to financial freedom.
