How Much Do First-Time Homebuyers Really Need To Earn To Purchase a Starter Home Across the Country?

How Much Do First-Time Homebuyers Really Need To Earn To Purchase a Starter Home Across the Country?

Evan Wyloge

 

How Much Do First-Time Homebuyers Really Need To Earn To Purchase a Starter Home Across the Country?

The news has not been great for first-time homebuyers lately. True, just about every type of buyer has woeful stories to tell about today’s stressed housing market, but first-timers? They have found themselves in an unfortunate league of their own.

The reason: Affordable starter homes, those essential first purchases in a typically lifelong journey of homeownership and building security and wealth, are vanishing across the U.S. like summertime cicadas. And these entry-level homes that do hit the market are now often priced out of the reach of the people who need them the most.

It’s a problem that has been gathering steam for some time. Classic starter homes began going up in earnest across the country after World War II, giving young Americans without much equity the ability to own property. Builders made these abodes smaller without as many high-end amenities to keep them more affordable for first-time buyers. But in recent years, they’ve shifted to erecting larger, more profitable homes as land, materials, and governmental costs have driven up prices. Many starters have been torn down so larger homes can go up in their stead. And investors have bid up the prices on those that remain.

Now, a poisonous combination of ballooning prices and surging mortgage interest rates have made buying a starter home nearly twice as expensive as it was before the COVID-19 pandemic, putting the cost out of reach for millions of Americans.

So, how much do most people really need to earn each year in order to secure their own piece of the American dream in today’s market? Realtor.com® looked at the household incomes that buyers would need to have in the 100 largest metropolitan areas to afford a two-bedroom starter home.

In 2019, the median listing price for such a home, typically in the bottom third of a metro’s price range, was just below $220,000—which would have required roughly a $49,000 household income. Today, the same home is listed for $325,000, a 48% increase in price. However, with mortgage rates around twice what they were three years ago, hitting 6.29% for 30-year loans last week, buyers would need to earn nearly $91,000 to afford the same house.

The situation isn’t likely to improve anytime soon.

“It’s a tough market, especially for first-time buyers,” says Realtor.com Chief Economist Danielle Hale. “Unfortunately, the outlook is not great.”

The long-term shortage of homes for sale—along with red-hot demand when mortgage rates were at record lows and buyers looking for more space during the pandemic—allowed home prices to surge to new heights over the past few years.

“There’s not a lot out there,” says Len Kiefer, a deputy chief economist for Fannie Mae. “This has been going on for 40 years.”

And some big changes in the market would be needed for first-time buyers to have a better chance at being able to afford starter homes.

In the short term—the next several months at the very least—it doesn’t look like mortgage rates will fall or incomes will shoot up. But there are signs that the beginning of a housing correction could put starter-home shoppers back into a better position. More homes are for sale and there are fewer buyers who can afford to compete for them.

“We have seen buyer demand pull back in a big way, because affordability has come down so much,” Hale says. “And hiked interest rates seem to be having an impact, with listing inventory climbing in the past few months.”

To find out how much a starter home costs across the nation, Realtor.com looked at the median list prices for two-bedroom homes in the 100 largest metropolitan areas for September, using a 6.25% mortgage rate. Then we calculated the median monthly mortgage payment, including estimated taxes and insurance costs, to come up with the median annual household income buyers would need to afford a starter home. This assumes buyers don’t spend more than 30% of their take-home pay on housing.

(Metros include the main city and surrounding suburbs, towns, and smaller urban areas.)

If you’re curious to find out how much a starter home costs in the 100 largest metros, you can search the interactive table below to learn the estimated monthly payments and annual income required to purchase a two-bedroom home in these areas.

Salaries needed to buy a starter home in America’s top 15 metros

1. New York, NY

Median starter home list price: $495,000
Median monthly housing payment*: $3,453
Median annual household income required to purchase a starter home: $138,101

2. Los Angeles, CA

Median starter home list price: $700,000
Median monthly housing payment: $4,882
Median annual household income required to purchase a starter home: $195,294

3. Chicago, IL

Median starter home list price: $275,900
Median monthly housing payment: $1,924
Median annual household income required to purchase a starter home: $76,974

4. Dallas, TX

Median starter home list price: $310,000
Median monthly housing payment: $2,162
Median annual household income required to purchase a starter home: $86,487

5. Houston, TX

Median starter home list price: $265,000
Median monthly housing payment: $1,848
Median annual household income required to purchase a starter home: $73,933

6. Philadelphia, PA

Median starter home list price: $269,000
Median monthly housing payment: $1,876
Median annual household income required to purchase a starter home: $75,049

7. Washington, DC

Median starter home list price: $459,000
Median monthly housing payment: $3,201
Median annual household income required to purchase a starter home: $128,057

8. Miami, FL

Median starter home list price: $410,000
Median monthly housing payment: $2,860
Median annual household income required to purchase a starter home: $114,387

9. Atlanta, GA

Median starter home list price: $304,995
Median monthly housing payment: $2,127
Median annual household income required to purchase a starter home: $85,091

10. Boston, MA

Median starter home list price: $659,000
Median monthly housing payment: $4,596
Median annual household income required to purchase a starter home: $183,855

11. San Francisco, CA

Median starter home list price: $860,000
Median monthly housing payment: $5,998
Median annual household income required to purchase a starter home: $239,933

12. Detroit, MI

Median starter home list price: $169,999
Median monthly housing payment: $1,186
Median annual household income required to purchase a starter home: $47,428

13. Phoenix, AZ

Median starter home list price: $385,000
Median monthly housing payment: $2,685
Median annual household income required to purchase a starter home: $107,412

14. Seattle, WA

Median starter home list price: $609,950
Median monthly housing payment: $4,254
Median annual household income required to purchase a starter home: $170,171

15. Minneapolis, MN

Median starter home list price: $299,900
Median monthly housing payment: $2,092
Median annual household income required to purchase a starter home: $83,670

Source: realtors.com

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