Buying starter homes is cheaper than it was last year, and you can thank mortgage rates for that. But while starter home prices themselves are more expensive than a year ago, the income needed to afford them fell when mortgage rates did, according to Redfin.
For monthly payments on a starter home with a median price of $250,000, would-be homebuyers need to earn $76,995 a year. That’s 0.4% lower than a year ago and happens to be the first annual decline in about four years, the analysis read. In anticipation of an interest rate cut from the Federal Reserve, mortgage rates dropped this summer. The average 30-year fixed rate fell to 6.5% in August from 7.07% a year earlier, Redfin said. It’s fallen even further, with the latest weekly reading coming in at 6.08%.
“It’s great news that starter homes are becoming a little more affordable, but there’s a catch,” Redfin Senior Economist Elijah de la Campa said in the analysis. “Starter homes aren’t what they used to be. A decade ago, a turnkey four-bedroom house in a nice neighborhood was often considered a starter home, but today, a small fixer-upper condo is often all a first-time homebuyer can afford. The American Dream is changing; for many, it no longer involves a house and a white picket fence.”
But not only are starter homes not what they used to be, they’re much more costly than they were before the pandemic, as all homes are. Starter home prices are 51.1% higher than they were in August 2019 and 163% higher than they were in August 2012, according to Redfin.
Today, a typical household earns an estimated $83,853 a year, which happens to be 8.9% more than they need to afford a median-priced starter home and its accompanying mortgage. That’s a substantial improvement from last year, when a typical household only made 3% more than they needed.
“But it’s a setback from before the pandemic,” Redfin noted, when the typical household made 57.1% more than they needed to afford the median-priced starter home.
Want to know how much of a difference it is from a decade ago? It’ll hurt. In August 2012, a typical household earned more than twice as much as they needed to buy a normal starter home.
Not to mention, even though starter homes are cheaper than last year, there are only four metropolitan areas in just two states where they went from being considered unaffordable to affordable, meaning a household could spend less than 30% of their income on a typical starter home. That’s in West Palm Beach and Fort Lauderdale in Florida, along with Dallas and Fort Worth in Texas. Those boomtowns are awash in a glut of condos and seeing a spike in overall housing supply, but are also filled with insurance woes.
There are some pandemic boomtowns that are seeing steep drops in necessary incomes for starter homes, from Anaheim to Austin to Phoenix, but that still doesn’t mean they’re affordable. Anaheim, for one, is one of the most expensive metros in the country, where less than 0.1% of starter-home listings are affordable for a household earning the median income, according to Redfin. And there are some metros where the increases in incomes needed for starter homes are pretty considerable, such as Chicago and Los Angeles.
About three-quarters of starter homes for sale are affordable for households earning the median income, which is again an improvement from last August and might sound reasonable, but it’s down from almost 100% in both 2019 and 2012. Either way, it doesn’t even account for those not earning the median income, which we know not everyone does. Things have changed in the starter home world.
“Starter-home buyers are skewing older than they used to. When I first started working in real estate 20 years ago, they were kids fresh out of college. Now grads are saddled with huge student loans and are moving back in with Mom and Dad or renting,” a real estate agent said in the analysis. “I bought my first house at 23, but that’s hard to do today, in part because first-time buyers are competing with older Americans who want to downsize and are able to make higher offers.”