US Starter-Home Affordability Improves Year-Over-Year for the First Time Since August 2020

On Monday, Redfin reported that US homebuyers need to earn $76,995 per year to afford the median priced starter home (with a value of $250,000). That is down 0.4% year-over-year and the first annual decline since August 2020, when mortgage rates were nearing their record low.

According to Redfin, starter-home prices are up 4.2% year-over-year, but the income needed to afford a starter home fell because mortgage rates dropped enough to offset the increase in prices. The average interest rate on a 30-year mortgage fell to 6.5% in August from 7.07% a year earlier—the first annual decrease in three years. It has since declined further, now sitting at 6.08%. Still, the income needed to afford a starter home is only 3.6% below the record high of $79,857 last fall.

Redfin advises that house hunters should be aware that starter-home affordability may not improve much more, if at all, in the near future. The Federal Reserve’s latest interest rate cut and its plans for future cuts were highly anticipated, meaning they’re mostly priced into mortgage rates already. When the Fed cuts short-term interest rates, long-term rates like mortgage rates don’t always move down nearly as much. Home prices also tend to rise over time, so waiting to buy likely means a higher price tag and down payment.

Commenting on the report, Redfin Senior Economist Elijah de la Campa said:

“It’s great news that starter homes are becoming a little more affordable, but there’s a catch. 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. The American Dream is changing; for many, it no longer involves a house and a white picket fence.”