Starter home payments hit new high
Homebuyers in the United States now need to earn nearly $80,000 annually to afford the typical starter home, according to a new report from Redfin.
The monthly payment for such a home reached $1,981 in July, a 4.4% increase from the same time last year. This increase has pushed the required income to $79,252, just shy of the all-time high set last October.
The rising costs are driven by a combination of high mortgage rates and near-record home prices. In July, the average mortgage rate stood at 6.85%, slightly down from its peak in the spring but still more than double the rates seen during the pandemic. The typical starter home sold for a record $250,000, a 4.2% increase from a year earlier.
“Americans need to earn more than a year ago—and much more than before the pandemic—to afford a starter home because mortgage rates are elevated and home prices are near record highs,” the report noted.
The typical household earns an estimated $83,966, which is just enough to afford a starter home. However, many people in the market for these homes earn less than the median income. A family earning 80% or less of the median income—$67,173 or below—would struggle to afford the typical starter home.
While wages are increasing, they aren’t keeping pace with the rising cost of homeownership. Average hourly earnings were up 3.6% year-over-year in July, but this lags behind the 4.4% increase in the income needed to buy a starter home.
The affordability of starter homes continues to decline. Around 70% of starter homes are now affordable to the median-earning household, down from about 73% a year ago and close to the record low.
Despite the financial challenges, starter homes remain in high demand. In July, pending sales of starter homes rose 10% year-over-year, reaching their highest level in nearly two years. This surge in demand, driven by lower-income families, middle-income families, and investors, is one reason why prices have hit record highs.
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“There are neighborhoods here that are both desirable and affordable, with homes selling in the $150,000 to $350,000 range,” said Ben Ambroch, a Redfin Premier agent in Milwaukee. “But first-time buyers are struggling because those homes typically get at least five offers.
“I recently listed a house for $210,000 and it received several bids, one of which included an offer to buy the seller pizza every Friday night until the deal closed. We ended up going with a higher offer, but that’s an example of the creativity we’re seeing as buyers compete for starter homes.”
There are some positives for those looking to buy a starter home. The inventory of available starter homes has increased, with listings up nearly 20% year-over-year in July, compared to a 4.1% increase for mid-priced homes. This gives prospective buyers more options in certain parts of the country.
Additionally, mortgage rates have been gradually declining. The average weekly mortgage rate dropped to 6.46% as of August 22, down from 7.22% in May and well below the two-decade high of 7.79% recorded last October.
Another encouraging sign is that the growth in income needed to afford a starter home is slowing. The 4.4% year-over-year increase in required income is one of the smallest since early 2021. By comparison, the increase was 14% in July 2023.
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