Starter Homes: Not as Cheap as They Used to Be

More bad news for those looking to get into the game of housing: due to rising costs, interest, low inventory and other factors, the typical first-time homebuyer must earn an average of $64,500 to afford a starter home—which has also increased $7,200 (or 13%) compared to a year ago. 

According to Redfin, the typical starter home sold for an eye-watering record of $243,000 in June 2023, up 2.1% year-over-year and up 45% from before the pandemic. At the same time mortgage rates have hit 6.7% in June, up from 5.5% year-over-year and under 4% pre-pandemic. 

Redfin continued saying that prices for starter homes have continued to tick up because there are so few homes 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 23% from a year earlier in June, the biggest drop since the start of the pandemic. The total number of starter homes on the market is down 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 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,” said Redfin Senior Economist Sheharyar Bokhari. “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. That’s locking many Americans out of the housing market altogether, preventing them from building equity and ultimately building lasting wealth. People who are already homeowners are sitting pretty, comparatively, because most of them have benefited from home values soaring over the last few years. That could lead to the wealth gap in this country becoming even more drastic.” 

Do to a litany of circumstances, home prices have done nothing but shot up since the pandemic came to our shores due to record-low mortgage rates and remote work, but now rising mortgage rates are exacerbating the affordability crisis, especially for first-time buyers. A person looking to buy today’s typical starter home would have a monthly mortgage payment of $1,610, up 13% from a year ago and nearly double the typical payment just before the pandemic. Average U.S. wages have risen 4.4% from a year ago and roughly 20% from before the pandemic, not nearly enough to make up for the jump in monthly mortgage payments. 

Many prospective first-time homebuyers are between a rock and a hard place because rents remain elevated, too. The typical U.S. asking rent is just $24 shy of the $2,053 peak hit in 2022. 

Looking further into Redfin’s data, more than one-third (36.6%) of the country’s starter homes were purchased in-full with cash in May, down just slightly from the previous month’s decade high and up from 35.2% in 2022. 

Real estate investors are buying up a sizable chunk of today’s affordable homes. A record 41% of investor purchases were small homes–those with 1,400 or fewer square feet–in the first quarter. That’s up from 37% a year earlier. 

“Many house hunters searching for an affordable place to call home for themselves and/or their family are out of options, especially in more expensive parts of the country,” Bokhari said. “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. 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 also have another advantage. They don’t have to pay high mortgage rates, meaning it’s ultimately less expensive for them to buy homes, deepening the wealth gap in the country. 

Click here to see the report in its entirety, including breakdowns of state and regional areas.