Increasing Cost of Starter Homes Pushing Many Potential Homebuyers Out of the Market

On Thursday, Redfin reported that, according to its latest data, the monthly housing payment for the typical US starter home that sold in July was $1,981, up 4.4% year-over-year. According to Redfin’s calculations, homebuyers must earn $79,252 annually to afford the typical starter home, up 4.4% year-over-year and just a few hundred dollars shy of last October’s all-time high.

Redfins notes that 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 average mortgage rate was 6.85% in July, down slightly from its springtime peak but still more than double pandemic-era lows. The typical starter home sold for a record $250,000 in July, up 4.2% year-over-year.

Rising prices have pushed many middle-income Americans to buy starter homes and pushed many lower-income households out of the market altogether, Redfin said. The typical US household earns an estimated $83,966, just barely more than necessary to afford a starter home. But many people in the market for starter homes make less than the median income. A family earning 80% or less of the median income—$67,173 or less—cannot afford the typical starter home. Wages are increasing, but not as fast as the income needed to buy a starter home: Average hourly earnings were up 3.6% year-over-year in July.

Roughly 70% of US starter homes are affordable to the median-earning household, down from about 73% a year ago and near the record low.

Finally, Redfin says that with housing affordability so strained, starter homes are a hot commodity; lower-income families, middle-income families, and investors are all vying for them. Pending sales of starter homes rose 10% year-over-year in July to their highest level in nearly two years, while they dropped in all other price tiers. Rising demand for starter homes is one reason prices are at a record high.