Starter homes have become unaffordable in half of the 50 most populous U.S. metros – at least for families earning the local median income.
The typical starter home sold for a record $250,000 in July, up 4.2% year over year. This translates into a monthly housing payment of $1,981, up 4.4% from a year earlier, according to a new report by Redfin. To afford this payment, homebuyers must earn $79,252 in annual income – just a few hundred dollars shy of last October’s all-time high.
The typical U.S. household earns an estimated $83,966, but many middle- to low-income Americans make less than that, and a family earning 80% or less of the median income – $67,173 or less – cannot afford the typical starter home. Roughly 70% of U.S. starter homes are affordable to the median-earning household, down from about 73% a year ago and close to the record low.
All of this means that competition for starter homes has increased significantly among investors and families of different income brackets. Pending sales of starter homes rose 10% year over year in July to their highest level in nearly two years, despite falling in all other price tiers.
Affordability constraints are making buyers more creative with their offers, according to Ben Ambroch, a Redfin Premier agent in Milwaukee.
A house he recently listed for $210,000 received several bids, including an offer to buy the seller a 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,” Ambroch said. “There are neighborhoods here that are both desirable and affordable, with homes selling in the $150,000 to $350,000 range. But first-time buyers are struggling because those homes typically get at least five offers.”
California has perhaps the largest affordability gap for homebuyers, especially those in the market for starter homes.
Families in both Anaheim and Los Angeles would need to earn twice the local income to afford a starter home in July. In Anaheim, a family needs to earn $251,302 to afford the typical starter home. In Los Angeles, a household needs to earn $184,477 for a starter home.
Among the pool of starter homes on the market in many California metros, virtually none are affordable to someone earning the median income, analysts said.
The Rust Belt is currently the most affordable region in the U.S. in which to buy a starter home. Topping this list is Detroit, where a family needs to earn $24,590 to afford the typical starter home, and the median household income is $63,937.
Coming in second is St. Louis, where the typical household earns $85,750 and needs $42,218 for a starter home. Pittsburgh, Cleveland and Philadelphia round out the top five.
One bright spot for prospective homebuyers: listings of starter homes were up nearly 20% YOY nationwide in July, nearly five times more than the 4.1% increase for mid-priced homes.
