Housing Market: Income Needed to Buy a Starter Home Hits $77,000

Starter homes are now significantly less affordable than before the pandemic. With typical starter home prices having risen 51.1% since August 2019 to a median price of $250,000, many potential buyers find themselves in a financial crunch when it comes to financing. To afford these homes, buyers need an annual income of approximately $77,000, which reflects a minor decrease compared to last year but is still far from the affordability levels seen prior to COVID-19.

Housing Market: Income Needed to Buy a Starter Home Hits $77,000

Key Takeaways

• Current Median Price: The median priced starter home is $250,000, up 51.1% since August 2019.
• Income Needed: A household needs to earn $77,000 to afford a typical U.S. starter home.
• Income vs. Affordability: The typical household income is about $84,000, which is just 9% above necessary earnings for home affordability.
• Comparison to Past: In August 2019, households earned about 57% more than needed to afford a starter home.
• Regional Changes: Some areas have seen a shift from unaffordable to affordable starter homes, especially in Texas and Florida.

The Impact of the Pandemic on Housing Affordability

To understand why starter homes are much less affordable now, we must consider how the pandemic impacted the housing market. During the early stages of COVID-19, a mass exodus from urban centers occurred as remote work transformed living preferences. This surge in demand, coupled with low mortgage rates—initially at record lows—sparked an unprecedented rise in housing prices.

Data published by Redfin highlights that starter home prices saw a 4.2% increase year-over-year as of August 2024, which contrasts sharply with the significant rise observed since 2019. While the income needed to afford a starter home has decreased marginally by 0.4%, this comes after years of stark increases that have left many potential homeowners in a tough spot.

According to Redfin, back in August 2019, the income necessary to afford a starter home was just $39,997, with households earning an average income of $62,843—more than sufficient to secure home ownership. Fast forward to 2024, and you see the income needed for the same starter homes has skyrocketed, while median household incomes have not kept pace, reflecting a 33.4% increase in incomes, significantly lower than the 51.1% rise in starter home prices.

Changes in Starter Home Characteristics

It is important to note that the definition of a “starter home” has evolved. Previously, these homes might have included larger, family-style houses in good neighborhoods. Today, however, many first-time buyers can only afford small fixer-upper condos or modest townhouses. According to Redfin’s analysis, current conditions often force buyers to settle for homes that may need extensive renovations, differing greatly from the well-maintained options that young couples often aspired to a decade ago.

Elijah de la Campa, a Redfin Senior Economist, stated, “Starter homes aren’t what they used to be. A turnkey four-bedroom house in a nice neighborhood was often considered a starter home, but today, a small fixer-upper condo is often all a first-time homebuyer can afford.” This reflects a fundamental shift in expectations and reality regarding home ownership.

Interestingly, there is a strong generational element to the current home-buying crisis. Today's first-time buyers are typically older than previous generations, facing financial burdens such as substantial student debt. According to Blakely Minton, a real estate agent, “Starter-home buyers are skewing older than they used to be.” Many individuals now find themselves competing with older homeowners who wish to downsize, placing further pressure on the market.

Affordability Across Regions

The affordability landscape varies significantly across different regions of the U.S. While some metropolitan areas in Texas and Florida have recently transitioned from having unaffordable starter homes to more accessible options, many others continue to struggle with sky-high prices. For instance, in places like Anaheim, CA, potential homebuyers require an astounding $217,300 annual income to afford a starter home—a striking contrast to the national average.

In stark contrast, areas such as Fort Worth, TX and Dallas, TX have seen noticeable improvements in affordability. In West Palm Beach, households now only need to spend 28% of their income on housing compared to 31% last year. Dallas has experienced a similar decline, where the percentage dropped from 32.1% to 29.1% over the same period, making these regions more approachable for median-income earners.

Overall, stats show that 75.8% of starter home listings are currently affordable for a household making the median income, which marks an improvement from 72.6% the previous year. However, this figure is significantly lower than levels seen in 2019 and 2012, when nearly 100% of starter-home listings were accessible to median-income earners.

The Bigger Picture: Income Disparities and Cost Burden

Analyzing the data reveals the broader implications of affordability. Despite the marginal reduction in income needed to purchase a starter home, nearly 43.1% of listings become unaffordable for households earning just 80% of the median income. A household earning $76,995 now requires spending 27.5% of their earnings on housing, which is below the 30% cap that indicates a household is cost burdened. However, this is still a significant change from the less than 20% of income spent on housing in 2019 and 2012.

Moreover, this data highlights a growing trend of many middle-class households being pushed into a cost-burdened situation, where housing expenses comprise a disproportionate part of their income. This shift is indicative of wider economic issues.

In fact, affordability has been steadily decreasing, with a typical household earning about $84,000 today, only 8.9% higher than necessary for home ownership. In contrast, the median household income was 113% higher than the necessary income back in 2012, which showcased a much healthier market.

Future Outlook: What Lies Ahead for Homebuyers?

The future for starter-home affordability does not appear particularly optimistic. While anticipated Federal Reserve interest rate cuts may provide some relief, recent trends suggest that long-term mortgage rates do not always decline as expected. Experts agree that home prices will likely continue to rise over time, exacerbating the affordability crisis.

Political discussion around affordable housing initiatives has gained traction, especially as the next election approaches. Direct interventions proposed include tax credits for builders to incentivize the construction of affordable starter homes. These legislative efforts may offer some relief in the long term. However, until significant systemic changes occur, many first-time buyers will find themselves grappling with limited options.

As noted in a recent Redfin report, “While many people make enough on paper to afford a starter home, they often have other expenses like student debt that are preventing them from buying.” This quote succinctly captures the dilemma facing today’s buyers—they may qualify financially on paper, but real-world financial obligations make home ownership elusive.

Personal Note on the Subject

In my opinion, the shift in starter homes' affordability reflects broader societal changes and highlights the need for ongoing discussions about housing policy and personal finance education. The struggle of young and first-time buyers to find suitable housing options is increasingly challenging and underscores the urgency for viable solutions in today’s housing market.

In conclusion, while there have been some improvements in starter home affordability since the pandemic's peak, the overall market still poses significant challenges for potential buyers. The juxtaposition of rising home prices against stagnating incomes continues to create obstacles for many who dream of home ownership. With legislative actions on the horizon, it remains to be seen how these complexities will unfold and impact the housing market in the years to come.