15 Most Expensive Cities for First-Time Homebuyers

Start Slideshow

A first-time homebuyer in the U.S. must earn about $64,500 per year in order to afford a typical starter home, an increase of 13% from a year ago due to higher mortgage rates and higher home prices, Redfin reported Friday.

The typical starter home sold for a record $243,000 in June, up 2.1% from a year earlier, and up more than 45% from before the pandemic. Average mortgage rates hit 6.7% in June, up from 5.5% a year ago and just under 4% before the pandemic.

A person looking to buy today’s typical starter home would have a monthly mortgage payment of $1,610, nearly double the typical payment just before the pandemic, the report said. Average U.S. wages have risen 4.4% year over year and roughly 20% from before the pandemic, not nearly enough to make up for the jump in monthly mortgage payments.

According to Redfin, starter home prices continue to increase because so few homes are for sale, often prompting competition and pushing up prices for the ones that do hit the market. New listings of starter homes for sale dropped by 23% from a year earlier in June, the biggest drop since the start of the pandemic.

Redfin defines starter homes as those estimated to be in the 5th to 35th percentile by sale price in their market. It considers a home “affordable” if a buyer’s mortgage payment is less than 30% of their income.

The total number of starter homes on the market is down by 15%, also the biggest drop since the start of the pandemic. Limited listings and still-rising prices, exacerbated by high mortgage rates, have stifled sales activity. Sales of starter homes dropped by 17% year over year in June.

“Buyers searching for starter homes in today’s market are on a wild goose chase because in many parts of the country, there’s no such thing as a starter home anymore,” Redfin senior economist Sheharyar Bokhari said in a statement. “The most affordable homes for sale are no longer affordable to people with lower budgets due to the combination of rising prices and rising rates.”

This means that many Americans are locked out of the housing market altogether, preventing them from building equity and ultimately lasting wealth, Bokhari said. “That could lead to the wealth gap in this country becoming even more drastic.”

People who are already homeowners are in comparatively good shape, he said, because most of them have benefited from soaring home values over the last few years.

Redfin noted that many prospective first-time homebuyers are between a rock and a hard place, because rents also remain elevated. The typical U.S. asking rent is just $24 short of its $2,053 peak in 2022.

All-Cash-Buyers Juggernaut

Redfin reported that 36.6% of the country’s starter homes w purchased in May were cash sales, down slightly from the previous month’s decade-high and up from 35.2% a year earlier. Real estate investors are gobbling up today’s affordable homes, according to the report. A record 41% of investor purchases in the first quarter were small homes, those with 1,400 or fewer square feet. That’s up from 37% a year earlier.

“As prices for the most affordable homes continue to climb and rates remain elevated, it’s becoming more true that you have to be wealthy to buy a home — especially if it’s your first one,” Bokhari said. “That’s why we’ve seen the share of affordable homes going to cash buyers, either individuals or investors, tick up: because they’re the only ones who can afford them.” Cash buyers are also unaffected by high mortgage rates, meaning that it is ultimately less expensive for them to buy homes.

Though monthly payments on starter homes are becoming more expensive and an increasing share are going to cash buyers, in some ways, the market is easier to break into than it was during the pandemic buying boom. Some first-time homebuyers are able to buy a home without a bidding war, and in some metros, prices have come down.

See the gallery for the 15 U.S. metro areas — out of 50 in Redfin’s analysis — where first-time homebuyers need the highest income to afford a starter home. Researchers calculated monthly median mortgage payments by assuming the buyer made a 20% down payment, and took that month’s median sale price and average mortgage-interest rate into account, including principal, interest, taxes and insurance.

Start Slideshow