What First-Time Buyers Need to Earn to Afford a Home Today

Pop quiz! What’s something no first-time buyer wants to hear when they’re talking to a mortgage lender? 

How about “Sorry, but your income isn’t high enough,” or “You need to increase your household income by at least X%.” 

Unfortunately, a lot of actively searching first-time buyers are finding they need significantly more income than a year ago to offset the higher cost of buying a starter home. 

That’s the gist of Redfin’s latest report, according to which first-time buyers need to earn about $64,500 a year—about 13% ($7,200) more than a year ago—to afford the typical starter home. And that’s largely due to higher mortgage rates and home prices. 

Between record-low inventory and mortgage rates still hovering around 7%, even low-budget starter homes cost more than they did a year ago. And the difference in cost between now and before the pandemic (which wasn’t that long ago) is even more startling.  

The typical starter home costs over 45% more than before the pandemic

In June 2023, the typical U.S. starter home sold for $243,000—a record high that’s 2.1% more than a year prior and a whopping 45% higher than before the pandemic. 

That same month, the average mortgage rate hit 6.7%, nearly a full percentage point higher than last June’s 5.5% and almost three percentage points higher than the pre-pandemic 4%. 

Because there are so few homes for sale, prices for starter homes have continued to climb as buyers and investors compete for those that are available. New listings fell 23% in June, compared to a year earlier, and the total number of starter homes on the market has dropped 15%, marking the biggest declines in both since the start of the pandemic

The combination of low inventory, still-rising home prices, and high mortgage rates have brought sales activity down by 17% year over year. 

Monthly mortgage payments have risen faster than U.S. wages

During the pandemic, home prices skyrocketed thanks to record-low mortgage rates and remote work driving up buyer demand. Cut to the present, and near-7% mortgage rates, combined with record-low inventory, are putting even the least expensive homes out of reach for many first-time buyers. 

This writer, in fact, vividly remembers looking at homes back in 2019, comparing them to rents in the area, and thinking how much more affordable it was to buy a home. Nowadays, not so much. 

A buyer shopping for a typical starter home today would be looking at a monthly mortgage payment of $1,610—13% more than a year ago and almost double what they would have paid just before the pandemic. 

The average U.S. wage has grown 4.4% from a year ago and about 20% from before the pandemic, but that’s not nearly enough to offset the increase in monthly mortgage payments. 

Many would-be first-time buyers are in a tight squeeze because rents also remain high enough to make it difficult, if not impossible, to save for a down payment. The typical asking rent in the U.S. is just $24 under the $2,053 peak set in 2022. 

Those locked into 12-month leases aren’t as likely to notice the overall decline in rent growth, but the surge in multifamily housing coming onto the market may offer some relief to renters currently searching for a new place, especially if those new apartments are offering financial incentives to new tenants. 

Last week on the Hot Sheet, host Byron Lazine touched on this in relation to the Fed’s curious method of calculating shelter inflation.  

First-time buyers actually need less income in these three metros

Compared to 2022, first-time buyers in San Francisco, Austin, and Phoenix need less money to purchase a starter home in 2023. Because these three metros are the only ones where home prices have actually declined enough to lower costs, despite higher mortgage rates. 

To buy the typical starter home in San Francisco, a homebuyer would need an annual income of at least $241,200. That’s down 4.5% ($11,300) year over year. In Austin, buyers would need $92,000 a year—down 3.3% from one year ago. Phoenix buyers need $86,100 a year—down roughly 1% from a year earlier. 

Prices of starter homes declined the most in these three metros. Median sale prices dropped 13.3% to $910,000 in San Francisco, down 12.2% to $347,300 in Austin, and down 9.7% to $325,000 in Phoenix. 

Prices fell in those three metros after soaring in 2020 and 2021. During that time, buyers in the Bay Area took advantage of record-low mortgage rates to buy into the expensive market. Austin and Phoenix prices skyrocketed thanks to the massive influx of remote workers. 

Fast forward to now, though, and with mortgage rates more than twice what they were then, homeowners locked into lower rates are in no hurry to sell. Remote-work relocations are still happening but to a much lesser degree. Demand has cooled in the Bay Area because those high mortgage rates make super-expensive homes even more expensive.

Starter home prices fell year over year in 13 other markets—mainly expensive West Coast metros, with the next-biggest annual declines in San Jose (-8.7% to $925,000), Sacramento (-7.3% to $417,000) and Oakland (-7.3% to $630,000). 

Prices also dropped in— 

1. Las Vegas, NV
2. Seattle, WA
3. Denver, CO
4. Los Angeles, CA
5. Portland, OR
6. Anaheim, CA
7. San Diego, CA
8. Riverside, CA
9. Pittsburgh, PA
10. Minneapolis, MN

In all but the three metros with the biggest starter home price declines, the income needed for a starter home still went up because the drop in home prices wasn’t enough to offset the impact of higher mortgage rates. 

First-time buyers need 25% more income to buy a starter home in Miami

The annual income needed to buy a starter home has grown the most in Florida, starting with Fort Lauderdale, where buyers need $58,300 a year to buy a $220,000 starter home—up 28% from one year ago, which is the biggest increase in the 50 most populous U.S. metros. 

Miami is next in line, with a minimum of $79,500 a year to buy a typical $300,000 starter home—up 24.8% year over year. 

Newark, NJ, rounds out the top three with a minimum of $88,800 required to purchase a $335,000 home—up 21.1% from a year earlier. 

These three metros—Fort Lauderdale, Miami, and Newark—also saw the biggest increases in starter home prices, climbing 15.8%, 13.2%, and 9.8% year over year, respectively. 

And while prices for starter homes have gone up most in Florida, they’re still less pricey than homes in Austin or Phoenix, where prices took off during the pandemic and have since come down (to a point). 

Home prices are climbing in Florida because retirees and remote workers are still flocking in. despite climate risks. Most are drawn by the combination of relative affordability and warmer weather. Florida’s lack of a state income tax is also a draw. 

And while prices have climbed since the pandemic, thanks to rising demand, homes and the general cost of living in Florida are still typically more affordable than in places like Los Angeles, Boston, and New York City. 

Fully half of the ten most popular U.S. metros for relocating homebuyers are in Florida. 

All-cash buyers more than a third of U.S. starter homes

In May 2023, all-cash buyers purchased over a third (36.6%) of the starter homes in the country—just slightly below the 35.2% from May 2022. 

It’s worth noting that this data is for May—two months before this blog was written—as it’s the most recent month for which this kind of data is available. Other data in the Redfin report we’re referencing here is from June. 

Real estate investors are still purchasing a significant share of today’s most affordable homes, and smaller homes—with 1,400 square feet or fewer—now account for a record 41% of investor purchases. That’s a 37% increase from the same time last year. 

Cash buyers don’t have to worry about high mortgage rates for the actual purchase of the home. If they can also cover any needed repairs and renovations with cash, so much the better. Otherwise, they’re looking at higher rates for the loans they would need to upgrade these properties—at which point they would then need to charge more to offset those costs. 

Homeowners looking to sell their homes generally favor those who can afford to pay all cash, as they don’t need to worry that a buyer’s financing will fall through, upending the deal and requiring them to start again. 

For buyers not in a position to compete with all-cash buyers/investors, the increase in investor purchases means they have even fewer options to choose from—whatever homes the investors don’t want—further widening the wealth gap and making it more difficult for cash-strapped renters to become homeowners. 

That said, even with these challenges, the market is, in some ways, easier for buyers to break into than it was during the pandemic buying frenzy. In some markets, at least, buyers are less likely to encounter a bidding war, thanks to cooling demand. 

Takeaways for real estate agents

Most likely, it won’t surprise any of your first-time buyers that a starter home costs more today–-in most markets—than it did a year ago. Overall, home prices continue to climb, and wages have not kept up with the higher cost of buying a home. 

It’s possible, though, that mortgage rates will start an encouraging downward trend before the year is up. And a return to 5% rates will loosen the lock-in effect and motivate more sellers to list their properties. But lower rates will also bring more buyers into the market. 

Regardless of what the market is doing, look for every advantage you can find for each client to make the buying or selling process as affordable or as profitable as possible. 

As Phil Jones pointed out in a recent BAMx livestream (for REFER), it doesn’t have to be the best time to buy or even the “right” time to buy (or sell). It just has to be a good time for your client. And that will depend on their unique situation and what they stand to lose by doing nothing.