Pending sales of starter homes rose by 10.2% year over year in July, reaching the highest level since October 2022. According to a newly released Redfin analysis, first time homebuyers (FTHBs) are making a comeback in this expensive and sluggish market.
“Lower-priced homes are really moving right now, especially since rates went down to around 6.5%,” said Derrell Skillman, a Redfin Premier agent in San Antonio, where pending sales of starter homes rose 22% last month. “We are seeing a lot of younger buyers looking at smaller starter homes."
Redfin analysts theorize that pending sales for starter homes have strengthened due to easing mortgage rates, which began in mid-July. FTHBs, who comprise a significant proportion of the starter-home market, are more sensitive to rate drops because they are less likely to have a large down payment. In turn, rate changes have a greater impact on their monthly payments.
“The overall market remains sluggish, but we are beginning to see first-time homebuyers come off the sidelines, buoyed by falling mortgage rates and an increased number of homes hitting the market,” said Redfin Senior Economist Sheharyar Bokhari. “Not only do you have young families and investors looking at starter homes, you also have buyers who have been forced to consider less-expensive options due to near-record home prices.”
Redfin defines starter homes as having a sale price in the 5th-35th percentile of the area market. Pending sales of middle-price homes (where the sales price was in the 35th-65th percentile of the market) fell 6.5% in July compared to a year earlier, while upper-price homes (65th-95th percentile) fell even more, down 10%.
Because homes go under contract a month or two before getting sold, the Pending Home Sales Index generally leads Existing-Home Sales by a month or two. Redfin analysts believe future starter home sales should strengthen even more in August due to July’s spike in pending sales.
Closed sales of starter homes fell 0.6% last month compared to last year, but still outpaced middle- and upper-price homes, which fell 3.9% and 3.4%, respectively.
Price-wise, the typical U.S. starter home sold for a record $250,000 in July, up 4.2% year over year. But, that price growth was slower than middle- and upper-price tiers, which rose 4.6% and 5%, respectively. “More buyers means more sales, but so far we aren’t seeing prices skyrocket, because the rising number of homes hitting the market is enough to satisfy the increased demand—a positive outcome for both buyers and sellers,” Bokhari added.
The rise in inventory levels allowed starter home price growth to stay lower than other brackets. The number of starter homes on the market spiked 18.9% from last year to the highest level seen since October 2022, pushed by an 18.8% rise in new listings. Meanwhile, inventory in the middle- and upper-price tiers increased by just 4.1% and 1.6%, respectively.
Despite the increase, Redfin’s report notes that inventory is still sitting well below pre-pandemic levels. For example, there were roughly 30% more starter homes on the market in July 2019 than July of this year.
