SitemapBuying a home has never been more financially out of reach than it is now. Despite mortgage rates hovering around 7%, US home prices remain high as supply-and-demand imbalances intensify competition among potential buyers. First-time homebuyers, largely consisting of millennials and Gen Zers, are really getting a raw deal. That's because starter homes are disappearing from the market as homeowners with low, locked-in monthly payments refrain from listing their homes for sale, and homebuilders focus on more lucrative projects.
It means the few that are making their way to the market are priced way higher than they once were. Coupled with slower wage growth and a cooling labor market, it has become even more difficult for first-time buyers to break into homeownership. "The most affordable homes for sale are no longer affordable to people with lower budgets due to the combination of rising prices and rising rates," Sheharyar Bokhari, a senior economist at Redfin, said in a statement. "That's locking many Americans out of the housing market altogether, preventing them from building equity and ultimately building lasting wealth."
Here's the state of starter homes right now. Starter homes commonly refer to smaller, more budget-friendly houses primarily acquired by first-time buyers or individuals with constrained finances. In June, the median sale price for the typical starter home, defined by Redfin as the 5th to 35th percentile of homes by sale price, was $243,000 — up more than 45% from before the pandemic, Redfin reported. The income now needed to afford a $243,000 home is roughly $64,500 per year, an increase of 13% since 2022. To determine the income needed to afford the typical starter home, Redfin used the rule of thumb that a homebuyer taking out a mortgage should spend no more than 30% of their income on their housing payment. The median household income in the US was $70,784 in 2021, according to the most recent Census data.
Referred to by real-estate agents as "entry-level" residences, starter homes enable buyers to accumulate equity gradually and subsequently upgrade to a nicer or newer property. What were once considered transitional properties to permanent residences have now become an appealing choice for buyers from all walks of life, largely due to a pervasive shortage of housing across the nation. "Before the housing crash of 2008, inventory peaked at about a 13-month supply — twice what we would see in a healthy market," Rick Sharga, founder and CEO of real-estate consulting firm CJ Patrick Company, told Bankrate, a personal finance company. "Today, we have about a three-month supply, which is about half of what we need."
The US housing shortage has been exacerbated by homeowners who, unwilling to give up their locked-in, low mortgage rates, opt to stay put and refrain from selling their homes. This coupled with a pullback in new home construction has left buyers competing for the few homes that remain available for sale. Starter homes are quickly disappearing from the market. According to Redfin, the number of starter homes for sale fell 15% on an annual basis in June, also translating to the biggest decrease since the start of the pandemic. Their absence has made it difficult for many first-time buyers to afford homeownership, especially in Fort Lauderdale, Florida; Newark, New Jersey; and Miami, where the income needed to purchase starter homes increased the most. In these cities, a typical starter home now costs $220,000, $335,000 and $300,000, respectively.
In addition to dissuading homeowners from moving, elevated mortgage rates are also driving starter homes beyond the grasp of many would-be buyers. According to Freddie Mac, the average US fixed interest rate for a 30-year mortgage rose to 6.96% this week, marking the third consecutive week of increases. During the same period in 2022, the 30-year, fixed-rate mortgage averaged 5.22%. The uptick in rates has added hundreds of dollars to prospective buyers' monthly mortgage payments. It's helped to push housing affordability to an all-time low. "There is no doubt continued high rates will prolong affordability challenges longer than expected, particularly with home prices on the rise again," Sam Khater, the chief economist at Freddie Mac, said in a statement. Predictions of mortgage rate declines in 2023 might offer some incentive for homeowners and buyers to reenter the market, though elevated housing costs are expected to keep many buyers on the sidelines.
Bucking a national trend, there are only three US metros where the median cost of a starter home has declined in 2023: San Francisco, Austin, and Phoenix. Though these cities still remain among the least affordable in the country, they've seen a pullback in buyer demand as homebuyer migration slows and the remote-work wave dies down. The cost of a typical starter home in San Francisco decreased 13.3% to $910,000; in Austin, decreased 12.2% to $347,300; and in Phoenix, decreased 9.7% to $325,000. The incomes now needed to afford those homes amount to $241,200, $92,000, and $86,100, respectively. "Home prices in these cities rose the fastest in the country when interest rates were low, but when interest rates went up really high and quickly, those prices were not completely sustainable," Bokhari, of Redfin, previously told Insider. "So, they're moving first, in terms of price declines."
Amid a growing sense of disillusionment among first-time buyers, a glimmer of hope emerges: A handful of small cities across the US still have many affordable homes available to middle-income earners — a segment teeming with prospective first-time homebuyers. Some cities in Ohio, particularly, are a sweet spot, according to data from the National Association of Realtors and realtor.com. An analysis from the companies shows that among the 100 largest US metropolitan areas, three cities in Ohio — Youngstown, Akron, and Toledo — have the most homes affordable to middle-income buyers.
In Youngstown, buyers earning at least $75,000 can afford to purchase 72% of listings, while those in Akron and Toledo can afford to buy 61%. In each of these cities, the median home listing price for all kinds of homes, not just starter homes, is more than $300,000 below the national median of $445,000, as of June, according to data from realtor.com. The median home price in Akron is $125,000, in Youngstown it is $119,900, and in Toledo it is $120,000.
"Youngstown is a weaker market in terms of home values," Ian Beniston, who has been the executive director of the Youngstown Neighborhood Development Corporation for 14 years, previously told Insider. "Since housing is much more affordable here at all times, your money can definitely go further here."
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