Increase in Earnings Required for Starter House by 13% compared to Last Year
According to a recent study conducted by real estate brokerage Redfin, first-time homebuyers now need to earn 13% more than they did a year ago to afford a typical starter home in the United States. In June, the average annual salary required for entry-level buyers was $64,500, up from $57,300 the previous year. Redfin defines affordability as a housing payment that accounts for no more than 30% of a buyer’s income.
The rising prices and increased mortgage rates in the housing market, combined with economic factors such as inflation and slow wage growth, have contributed to the dismal affordability conditions. Many areas of the country no longer have starter homes, making it challenging for buyers to enter the housing market and build equity.
The study also revealed that the average price of a starter home reached a record high of $243,000 in June, marking a 2.1% increase from the previous year and a staggering 45% increase since the start of the pandemic. Despite higher mortgage rates, which averaged 6.7% in June, buyers searching for affordable homes have faced significant challenges.
One of the main factors driving prices up is the limited availability of homes for sale. Many homeowners are hesitant to sell their properties and give up their ultra-low mortgage rates. In June, new listings of starter homes dropped by 23% compared to the previous year, the largest decrease since the beginning of the pandemic. Overall, the total share of starter homes on the market decreased by 15%, representing the biggest drop since the onset of the Covid-19 crisis.
Additionally, the scarcity of previously owned homes for sale has led to a 17% decline in sales compared to the previous year. The report also highlighted the significant role played by real estate investors in reducing the supply of affordable homes. In the first quarter, a record 41% of investors purchased small homes, defined as those with 1,400 square feet or less, marking a 37% increase from the previous year.
Various economic factors have contributed to the erosion of affordability in the housing market, making it increasingly difficult for first-time homebuyers to achieve their homeownership goals.
The affordability of starter homes has worsened recently, adding more challenges for first-time buyers. For instance, in June, the monthly payment for a starter home increased by 13% compared to the previous year, reaching $1,610. This payment is nearly double what it was prior to the pandemic. Meanwhile, average wages in the US have only increased by 4.4% over the past year and approximately 20% from pre-pandemic levels.
As if that wasn’t enough, rising rent prices have further strained the budgets of many prospective buyers. According to a study by Redfin, rents are still elevated, with the typical asking rent being just $24 shy of the peak reached in 2022, at $2,053.
Among the metros analyzed, only a few showed improved affordability compared to the previous year. For example, San Francisco, Austin, and Phoenix saw a decrease in the annual income needed to afford a starter home. In San Francisco, the required income decreased by 4.5% to at least $241,200 annually. Austin buyers needed to earn an average of $92,000, down 3.3% from the previous year, while Phoenix homebuyers had to bring in $86,100, down 1% from the previous year.
On the other hand, some markets still remain highly competitive. In Miami, potential buyers now need to earn at least $79,510 annually, a staggering 25% increase compared to the previous year, in order to afford a starter home priced at $300,000 in June. Similarly, Fort Lauderdale and Newark also experienced significant price increases, with buyers needing to make 27.6% and 21.1% more respectively, in order to afford homes in those areas.
Redfin suggests that more starter homes need to become available in these areas, or else people may be forced to relocate. The lack of affordable options is pushing prices higher, making it challenging for first-time buyers to break into the market. According to Luis Padilla, CEO of Oceanside Realty & Investment Inc./Padilla Team in Florida, Miami’s market has seen an influx of individuals from California, Chicago, and New York, which has further driven up prices. First-time buyers in Miami often qualify for lower-priced homes, but the current market conditions are making them increasingly unaffordable.
Overall, the lack of inventory and increasing prices are making it more difficult for entry-level buyers to find suitable homes, and unless more affordable options become available, many may be forced to leave their desired areas.
citation of information: https://www.redfin.com/news/starter-homes-price-income-needed-increase/