The housing market continues to favor buyers, forcing prices to slide and affordability to improve, according to a new report from Redfin.

Americans needed to earn $111,252 per year to afford the average home for sale in December, down 4% from $115,870 a year ago and 8.8% from a peak of $122,000 in June, the report showed. 

The income needed to afford a home had been rising on a year-over-year basis nearly every month for five years, as the pandemic homebuying surge drove up prices, but affordability has been consistently improving since the summer. Redfin considers a home affordable if a buyer taking out a mortgage spends 30% or less of their income on the monthly housing payment.

"The housing affordability crisis is showing signs of easing as costs come down slightly but meaningfully, opening the door for more Americans to make the jump to homeownership," said Chen Zhao, Redfin's head of economics research, in a press release Wednesday. 

Affordability improved nationwide because home prices have flattened and mortgage rates have decreased. The median home-sale price was $426,747 in December, slightly more than a year prior, while mortgage rates ended the year at 6.15%, down from nearly 7% a year prior. 

As a result, the median monthly mortgage payment fell to $2,675 in December from $2,800 a year ago.

Along with declining home prices, homebuyers are also scoring the biggest discounts since 2012, as the overwhelming amount of sellers in the market has grown buyers' negotiating power.

"While housing remains historically expensive, the trajectory is finally starting to reverse, with the door to buying a home opening a bit wider rather than closing tighter," Zhao said. "But while affordability is improving, Americans are contending with other obstacles on the road to buying a home, like nerves about layoffs and economic uncertainty."

The average American earns an estimated $86,185 per year, about $25,000 less than the income needed to afford the median-priced home. So while higher earners can now afford to buy a home, lower earners are still significantly priced out, although the median household income rose 4% last year, according to Redfin.

Where has affordability improved the most?

Homebuying affordability improved in 37 of the 50 most populous metro areas in the United States. 

Dallas, Sacramento, California, and Jacksonville, Florida, led the group, as the homebuyer income needed to afford a median-priced home in these cities decreased year over year by 7.4%, 6.8% and 5.9%, respectively, the report showed.

Home prices have increased in Detroit, Chicago and St. Louis, driving up the income needed to afford the typical home by 3.6%, 3.5% and 3%, respectively. But St. Louis was one of the 12 metros where the average household could afford a home, along with Pittsburgh and Cleveland, the report found.

The typical household in San Francisco, Los Angeles, San Diego and New York earns about half the income needed to afford a home.

The income gap between buyers and renters shrunk

Americans need to earn $76,020 to afford the typical rental, 46.3% less than what's needed to afford a home. While still significant, it's the narrowest the gap has been in three years, Redfin said. 

A year ago, the gap hit 55.6%, with the required salary for a rental at $74,464, and peaked at 66.2% in late 2023. While the income needed to afford a rental has increased, the typical household still earns about $10,000 more, the report found.

"We expect homebuying affordability to gradually improve in the coming year as mortgage rates stay closer to 6% than 7%, home-price growth loses steam and wages rise faster than housing costs," said Grishma Bhattarai, a Redfin economist, in a press release Wednesday.