Looking to buy a starter home? Bring a Pizza

SEATTLE – (By Dale King, Realty News Report) — A just-released report from real estate brokerage Redfin contains some disappointing news for house hunters resigned to the likelihood that the best they can do in this volatile market is to purchase a starter home.

In half of the 50 most populous metros in the U.S., Redfin states, “a family earning the local median income can’t afford a starter home.”

The report says the monthly payment for a typical U.S. starter home sold in July was $1,981, up 4.4 percent from a year earlier. That means home buyers must earn $79,252 a year to pay for that classification of dwelling whose price also shot up 4.4 percent year-over-year, leaving it just a few hundred dollars shy of last October’s all-time high.

“Americans need to earn more annual revenue than they did 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 says.

“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. “First-time buyers are struggling because those homes typically get at least five offers.”

Pepperoni with Thin Crust

“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,” he added. “We ended up going with a higher offer, but that’s an example of the kind of creativity we’re seeing as buyers compete for starter homes.”

Rising prices have pushed many middle-income Americans into the beginner home arena – and forced many lower-income folks out of the market entirely. “The typical U.S. household earns an estimated $83,966, barely more than necessary to afford a starter home,” says Redfin. “But many people in the market for starter homes make less than the median U.S. income. A family earning 80 percent 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 rose just 3.6 percent year-over-year in July.

The affordability gap for starter homes is widest in California. In both Anaheim and Los Angeles, a family would need to earn twice the local income to afford such a dwelling. Anaheim’s median income is $122,192; a family needs to earn $251,302 to afford the typical starter home. In Los Angeles, the median income is $93,197, but a household needs to earn $184,477 to cover a starter home purchase. The gap is only slightly smaller in San Diego, San Francisco and San Jose.

“Homes in the Bay Area are so expensive that even many high-earning tech employees have been priced out of the area, so they’re looking at neighboring cities,” said Craig Pellegrini, a Redfin Premier agent in the San Jose area. “I have one client who wanted to buy in Palo Alto, but they can’t afford it anymore so they’re looking in Sunnyvale and Santa Clara. That’s pricing out a lot of lower earners in those neighboring cities completely.”

Turn to the Rust Belt

Starter homes in the Rust Belt are most affordable to median-earning families, says the report. In Detroit, where median household income is $63,937, a family needs to take in just $24,590 a year to buy the usual starter home. That makes Detroit more affordable than any other major U.S. metro for acquiring starter-ranked dwellings.

Next comes 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.

Income needed to buy starter home in Austin drops

In Austin, a family must earn $117,781 to afford a median-priced starter home. That’s down 2.5 percent from a year ago, making it the only major metro that saw a decline. That’s because home prices have been falling all year in the Texas capital. But still, an Austin household earning the local median income of $103,945 can’t afford a starter home.

The income needed to afford the starter dwelling has increased most in Chicago (+22.5 percent), Detroit (+19.5 percent), Cleveland (+15.6 percent), Cincinnati (+14.7 percent) and Pittsburgh (+14.6 percent).

Not all the news is grim. Some bright spots for starter-home searchers include:

More dwellings on the market. Listings for starter homes were up nearly 20 percent year-over-year nationwide in July, much better than the 4.1 percent increase for mid-priced homes.
Mortgage rates down. The average weekly mortgage rate was 6.46 percent as of Aug. 22, down from 7.22 percent in May and a two-decade high of 7.79 percent last October.
Growth in income needed to afford a starter home slowing. The 4.4 percent year-over-year increase in income necessary to afford a starter home is one of the smallest changes since the start of 2021. By comparison, the hike was 14 percent in July 2023.

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