Buyers must earn nearly twice as much as before
the pandemic to afford the typical starter home, due to the one-two
punch of high prices and mortgage rates. One sliver of hope:
Affordability of starter homes is slowly improving after hitting a
low point at the end of 2023.
(NASDAQ: RDFN) — Homebuyers must earn $75,849 annually to afford
the typical U.S. starter home as of February, up 8.2% ($5,767) from
a year earlier, according to a new report from Redfin (redfin.com),
the technology-powered real estate brokerage. The monthly housing
payment for the typical U.S. starter home was $1,896 in February,
also up 8.2% from a year earlier.
The income necessary to buy starter homes is increasing from a
year ago due to rising prices and mortgage rates: The typical
starter home sold for $240,000 in February, up 3.4% year over year,
and the average 30-year fixed mortgage rate was 6.78%, up from
6.26% a year earlier.
Starter homes are roughly half as affordable as they were before
the pandemic. Americans needed to earn $40,465 annually to afford
the typical U.S. starter home in February 2020, when the median
sale price was $169,000 and the average mortgage rate was about
3.5%.
Americans earning the median U.S. income can still afford the
typical starter home
Incomes are rising, but at less than half the rate of
starter-home costs. The typical American household earns an
estimated $84,072, up 5.5% from February 2023 (versus the 8.2%
increase in income needed to buy a starter home). That means the
typical household can afford the $75,849 median-priced starter
home, but they have less money left over after housing payments
than they used to.
Today, the median household income is just 11%
higher than the income needed to buy a starter home. One
year ago, the median household income was 14% higher
than the income required to buy a starter home, and four years ago,
just before the pandemic began, the median income was 63%
higher.
Zooming out from starter homes to the overall market, a separate
Redfin report found that a homebuyer must earn $114,000 to afford
the typical U.S. home, roughly $30,000 more than the median U.S.
household income.
It’s increasingly hard for lower-income families to buy a
starter home
In the past, it was often true that people earning less than the
median income could afford starter homes in much of the country;
starter homes were considered an affordable option for first-time
buyers.
Today, someone earning 80% of the median income—$67,258—could
not afford the typical U.S. starter home. Before the pandemic real
estate boom, someone earning 80% of the median income—roughly
$53,000 in early 2020—could afford the typical starter home, which
required an annual income of just over $40,000.
“The pandemic housing-market boom changed the definition of a
starter home,” said Redfin Senior Economist Elijah de la Campa. “A
decade ago, many people thought of a starter home as a small
three-bedroom single-family house. Now that type of home could cost
seven figures, especially in expensive parts of the country. The
most affordable homes are much smaller and often require a lot of
work to make them habitable—which makes them cost even more.
Today’s most affordable homes are still hard for the average
American to afford, let alone the average first-time buyer who
tends to put less money down in exchange for higher monthly
payments. Rising prices and mortgage rates are pushing buyers who
earn more than the median income to buy starter homes, and often
pushing buyers who earn less money out of the market.”
Another challenge for first-time buyers: They’re often competing
with all-cash offers for limited inventory of starter homes. More
than one-third (36.5%) of the nation’s starter homes were purchased
in cash in February, near the highest level in a decade. It’s
likely that many of those homes sold to real estate investors, who
are turning them into rentals and thus removing them from the stock
of for-sale starter homes. Others likely sold to repeat homebuyers
using equity from a previous sale.
Starter homes are more affordable than they were last
fall
While the income required to buy a starter home is up from a
year ago, it’s down 8% ($6,524) from last October’s all-time high
of $82,373. That’s because mortgage rates have come down from their
recent high. Mortgage rates are sitting around 6.8%, down from a
two-decade high of 7.8% in October 2023. Affordability should
continue improving throughout 2024 as mortgage rates gradually
decline further.
There are also a few other encouraging signs for first-time
buyers:
- There are more starter homes to choose from. Active listings of
starter homes rose 7% annually in February, the biggest increase in
at least a decade. (The caveat is that the number of starter homes
on the market fell to a record low in February 2023, which is part
of the reason for the big year-over-year uptick.)
- In some metros, first-time buyers are able to negotiate prices
down or get concessions from sellers because high costs are pushing
down homebuying demand.
Metro-level* highlights: Starter homes, February 2024
*For the 50 most populous U.S. metros
- The income needed to afford a starter home is highest in
California. A homebuyer needs to earn roughly $319,000 to buy the
median-priced starter home in San Jose, $306,000 in San Francisco,
and $247,000 in Anaheim.
- It’s lowest in the Rust Belt: Detroit ($22,000), Pittsburgh
($32,000) and St. Louis, MO ($37,000).
- The income needed to afford a starter home declined in just 1
metro area: Pittsburgh (-0.8% year over year to $32,000).
- It increased most in New Brunswick, NJ (17.5% to $126,000),
Miami (16.7% to $104,000) and Montgomery County, PA (16% to
$99,000).
To view the full report, including charts, tables and
methodology, please visit:
https://www.redfin.com/news/starter-home-affordability-february-2024
About Redfin
Redfin (www.redfin.com) is a technology-powered real estate
company. We help people find a place to live with brokerage,
rentals, lending, title insurance, and renovations services. We run
the country's #1 real estate brokerage site. Our customers can save
thousands in fees while working with a top agent. Our home-buying
customers see homes first with on-demand tours, and our lending and
title services help them close quickly. Customers selling a home
can have our renovations crew fix it up to sell for top dollar. Our
rentals business empowers millions nationwide to find apartments
and houses for rent. Since launching in 2006, we've saved customers
more than $1.6 billion in commissions. We serve more than 100
markets across the U.S. and Canada and employ over 4,000
people.
Redfin’s subsidiaries and affiliated brands include: Bay Equity
Home Loans®, Rent.™, Apartment Guide®, Title Forward® and
WalkScore®.
For more information or to contact a local Redfin real estate
agent, visit www.redfin.com. To learn about housing market trends
and download data, visit the Redfin Data Center. To be added to
Redfin's press release distribution list, email press@redfin.com.
To view Redfin's press center, click here.
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version on businesswire.com: https://www.businesswire.com/news/home/20240328320723/en/
Contact Redfin Redfin Journalist Services: Angela Cherry,
913-638-8249 press@redfin.com
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