According to a Redfin report, the monthly payment for a typical U.S. starter home reached $1,981 in July, a 4.4% increase from the previous year. This means homebuyers need an annual income of $79,252 to afford a starter home, also up 4.4% year over year and just short of the record high set last October.
High mortgage rates and elevated home prices are pushing affordability beyond reach for many. The average mortgage rate was 6.85% in July, still more than double the lows seen during the pandemic. Additionally, the typical starter home sold for a record $250,000 in July, up 4.2% from last year.
Rising prices have made starter homes less accessible to lower-income households, with many being priced out of the market entirely. The median U.S. household income is estimated at $83,966, which is only slightly above what’s needed to afford a starter home. However, families earning 80% or less of the median income—$67,173 or less—cannot afford these homes. While wages have increased, they haven’t kept pace with the rising income needed to purchase a starter home, which saw a 3.6% increase in average hourly earnings year over year in July.
Currently, about 70% of U.S. starter homes are affordable to the median-earning household, down from around 73% a year ago and close to a record low.
The demand for starter homes is high, with pending sales rising 10% year over year in July, marking the highest level in nearly two years. This demand is driving up prices as lower-income families, middle-income buyers, and investors all compete for these properties.
In Southern California, the affordability gap is particularly stark. In both Anaheim and Los Angeles, a family needs to earn twice the local median income to afford a starter home. For example, in Anaheim, where the median income is $122,192, a household needs $251,302 to buy a starter home. Similarly, in Los Angeles, the median income is $93,197, while $184,477 is needed for a starter home.
In contrast, starter homes are more affordable in the Rust Belt. In Detroit, where the median income is $63,937, a family needs $24,590 to purchase a typical starter home, making it the most affordable major metro area for starter homes.
Austin is the only major metro where the income needed to afford a starter home has decreased, down 2.5% from the previous year due to falling home prices. Despite this, the local median income of $103,945 is still insufficient to buy a starter home in Austin.
