A Double Dose of Good News for Housing Affordability

Home Price Index went up 4.1%, while starter homes are more affordable than they’ve been in four years — in part due to a shift in perspective.

A couple of new studies found that affordability is getting better for home buyers — in ways that signal “further relief” ahead as well as a changing definition of starter homes.

First American’s Home Price Index found that annual affordability improved 4.1% for buyers in August, the first time that’s happened since 2021. Not only did dropping mortgage rates help, but household income increased by 3.1%. 

The third factor — home price appreciation — continued to climb, but at a slower rate and was not enough to offset the higher income and lower rates, said Mark Fleming, chief economist at First American.

First American is also expecting affordability to keep improving through the end of the year and into 2025. While home prices are likely to keep rising, mortgage rates are expected to keep dropping while income growth will continue to rise, albeit at a slower pace.

“The potential for further relief in the coming year could be a game changer for those waiting to enter the housing market,” Fleming said.

Starter Homes Are Also a Better Deal

U.S. homebuyers need to earn $76,995 a year to afford the median priced starter home of $250,000, according to a Sept. 30 report from Redfin. That’s just a 0.4% change, but it’s the first annual decline since August 2020.

Starter home prices are up 4.2% this year, but rising incomes and dropping mortgage rates offset that increase.

“It’s great news that starter homes are becoming a little more affordable, but there’s a catch,” said Redfin Senior Economist Elijah de la Campa in the report. “Starter homes aren’t what they used to be. A decade ago, 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. The American Dream is changing; for many, it no longer involves a house and a white picket fence.”

Geographic Differences

The cities studied with the biggest improvement in affordability according to First American’s study were Tampa, Florida (improving 14% year-over-year);  Denver (12.4%) and Portland, Oregon (11.7%). The cities with the biggest declines in affordability were Buffalo, New York (3.2% decrease); Cincinnati (2.2%) and Milwaukee (2%).

Other Signs

The improvement in affordability is being noticed in other measures as well. Redfin estimates the monthly median housing payment is down $300 from April’s all-time high while national inventory ticked up to 4.2 months, putting buyers in a better position to find a home.

Source: Real Estate News

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