First-time buyers hampered as starter homes become much less affordable

Starter homes are more affordable to the average American than they were a year ago, but they have become significantly less affordable over the past decade. That’s the conclusion Redfin reached in a data report released Monday.

The national real estate brokerage analyzed household income levels and monthly housing payments to calculate its affordability metric. Buyers in August 2024 needed to earn $77,000 per year to afford a median-priced starter home of $250,000. Starter homes are defined as those priced in the fifth to 35th percentiles of their respective markets, and homes are deemed affordable if the mortgage payment consumes no more than 30% of the household income.

The income needed to buy the typical starter home is down 0.4% from August 2023, when the median price was $240,000. Wages have grown as the median household income is now $83,853, compared to $79,689 a year ago. And affordability has been aided by lower mortgage rates, which shed more than half a percentage point during the year and averaged 6.5% in August, according to Redfin.

“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 report. “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.”

Importantly, while the starter-home segment has become slightly more affordable in the past year, it is much less affordable than it was in the post-recession housing recovery of 2012 and in the pre-pandemic period of 2019.

When comparing income to the cost of monthly mortgage payments, the typical buyer now earns 8.9% more than they need. In August 2023, that figure was only 3%. But in August 2019, households earned 57% more than they needed, and in August 2012, they earned 113% more.

Redfin calculated the median monthly mortgage payment by assuming a 3.5% down payment and using the median sale price and average mortgage rate for each month.

Redfin noted the post-pandemic spike in home prices due a sudden surge in demand tied to historically low mortgage rates. Consequently, the median price of a starter home is now 51% higher compared to August 2019 and 163% higher compared to August 2012. Wage growth, meanwhile, rose by 33% in the past five years and by 58% in the past 12 years.

“Put another way, the income needed to afford a starter home has tripled since 2012, while the median household income hasn’t even doubled,” Redfin reported.

In both 2012 and 2019, nearly all starter homes listed for sale were affordable to households earning the area median income (AMI). That share has dropped to about 76% today. For lower-income households earning 80% of the AMI, only 43% of starter homes are affordable.

“While many people make enough on paper to afford a starter home, they often have other expenses like student debt that are preventing them from buying,” Blakely Minton, a Philadelphia-based Redfin agent, said in the report.

“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.”

When analyzing the 50 most populous metro areas in the country, Redfin found some that have become more affordable over the past year. In Anaheim, California, the income needed to buy a starter home shrank by 8.1% since August 2023 — although the income needed to enter the market stands at an eye-popping $217,300.

Austin (-5.8%); West Palm Beach, Florida (-5%); Phoenix (-4.8%); and Dallas (-4.7%) also saw improved affordability for the typical first-time buyer over the past year.

Conversely, some relatively affordable metros in the Midwest recorded the sharpest increases for the income needed to enter the market. In Chicago, a buyer needs to earn $77,238 per year to afford the median-priced starter home, up 15.4% year over year. It was followed by Los Angeles (+14.7%), Detroit (+14.5%), Cincinnati (+9.7%) and Pittsburgh (+9.6%).