SEATTLE, WA — Today, buying a home – the classic symbol of the American Dream – is no longer a straightforward endeavor. As per recent data from Redfin, a technology-powered real estate brokerage, this symbol is becoming increasingly unattainable for many.
Once a stepping-stone to building wealth, the typical U.S. starter home now requires an annual income of $75,849, an 8.2% ($5,767) increase from the previous year. Additionally, the simultaneous rise in housing prices and mortgage rates compounds the situation. The typical starter home sold for $240,000 in February, up 3.4%, with the average 30-year fixed mortgage rate was 6.78%, up from 6.26% in the previous year.
With these rising costs, it is worth noting that starter homes today are roughly half as affordable as they were before the onset of the pandemic. To put it into context, in February 2020, when the median sale price was $169,000 and the average mortgage rate was about 3.5%, Americans needed to earn just $40,465 annually to afford the typical U.S. starter home.
The silver lining, however, is that the typical American household, which earns an estimated $84,072 – 5.5% higher from the previous year, can still afford the $75,849 median-priced starter home. But it’s a gloomy lining, at best, because households are left with less disposable income than in the past.
The disparity between incomes and the cost of starter homes is growing. A mere 11% gap separates the median household income and the income necessary to purchase a starter home today. This gap was 14% a year ago and a whopping 63% just four years ago, before the pandemic.
Now, let’s assume a broader perspective. The overall housing market tells a similar story. A separate Redfin report found that a homebuyer must earn $114,000 to afford the typical U.S. home, about $30,000 more than the median U.S. household income. So, it’s clear that this financial stretch isn’t restricted to starter homes.
The impact of these trends is being acutely felt by those earning less than the median income. Previously, most could afford a starter home. Unfortunately, this is no longer the case. An individual earning 80% ($67,258) of the median income is now priced out of the starter home market. This represents a stark contrast to pre-pandemic times when a starter home required an annual income of just over $40,000.
The evolving definition of a starter home, driven largely by the pandemic housing market boom, is also a contributing factor. A starter home, once imagined as a small, three-bedroom, single-family house, could now fetch seven figures in more costly urban areas. According to Elijah de la Campa, Redfin Senior Economist, “Today’s most affordable homes are still hard for the average American to afford, let alone the average first-time buyer.”
Looking ahead, the news isn’t all bleak. While the income needed to purchase a starter home is higher than a year ago, it’s down an encouraging 8% ($6,524) from last October’s peak. A decline in mortgage rates and expected further drops in 2024 are fueling this trend.
Moreover, market dynamics present a few other glimmers of hope for first-time buyers. The supply of starter homes is increasing. Active listings rose 7% annually in February, the greatest rise in a decade.
So yes, the tide of starter home prices is indeed rising. However, with time and market corrections, there might still be hope for the average American to catch this wave.
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