This month, the number of large U.S. cities where people earned at least 100% of what they would need to afford an entry-level home dropped from five to four. In August, there were six.
According to study results released last week by real estate listings portal Point2Homes, Baltimore, Md., disappeared from the list last month and Kansas City, Mo., vanished this month.
Large cities that are left include: Detroit, Mich.; Tulsa, Okla.; Memphis, Tenn.; and Oklahoma City, Okla.
To conduct the study, Point2Homes “analysts reviewed data on the median price of a starter home and renter households’ median incomes in the 50 largest U.S. cities,” said the company. As of October, only 15 of the cities had starter homes available for under $200,000.
People in 13 cities didn’t even make half of what they would need to buy a starter home. In New York and Los Angeles, the cities with the largest populations in the U.S., renters only earned 30% to 34% of what they would need to purchase a starter home.
In Chicago, the third most populous city in the nation, renters earned 69% to 74% what they would need. While this doesn’t seem as bad as the situation in New York and L.A., it is still a challenge for potential buyers, Point2Homes said.
Those who earn 70% or 80% of the income they need to comfortably cover their monthly payments would be in a “tense, frozen decisional space,” the company explained, and “the question of whether they should or could make the switch to homeownership,” would be unclear.
To comfortably afford a home, buyers should not have a mortgage payment that exceeds 30% of their gross monthly income.
“Once upon a time, nearly 70% of all new builds were starter homes – single-family houses with 1,400 square feet or less that started at $6,990,” said Point2Homes. “But that was in the 1940s. Fast forward to 1980 and that share fell to 40%. Then, in 2019, the U.S. Census Bureau reported that a mere 7% of all new homes were represented by the small, entry-level homes that are affordable for first-time buyers – and the prices aren’t even remotely similar.”
Debt.org said in February that homeownership in the U.S. has “declined across the board” over the past two decades, especially among young Americans. From 1996 to today, the rate of homeownership under the age of 35 has declined by almost 10%.
In March, the National Association of Realtors released research that found millennials now make up “43% of home buyers – the most of any generation,” up from 37% the previous year. This research also found that the “largest share of buyers purchased in suburban areas and small towns” rather than big cities.
“Some young adults have used the pandemic to their financial advantage by paying down debt and cutting the cost of rent by moving in with family,” said Jessica Lautz, vice president of demographics and behavioral insights for the National Association of Realtors. “They are now jumping headfirst into homeownership.”
Around 27% of younger millennials cited in that study said saving for a down payment was the most challenging step in the home buying process. Only 1% of older baby boomers said it was a challenge, and Point2Homes found that downsizing older generations are competition for younger homeowners trying to get a starter home.
According to the company’s report, increasing costs of land, zoning restrictions and rising costs for building materials, have also made starter homes “the stuff of myths and legends – the actual unicorns of the real estate market.”
Point2Homes’ study found that recent pressure on buyers has followed increasing interest rates. Rates were at 5.5% when Baltimore and Kansas City were still on the affordable list in August. In September, the rates went up to 6% and this month they went up to 7%.
“As expected, the quickly rising interest rates took a large bite out of renters’ already limited buying power in America’s most expensive markets,” said Point2Homes. “Even under this study’s ideal conditions (in which we assumed a 20% down payment was already covered), entry-level homes were still unaffordable for renters in the majority of large U.S. cities.”
Related
Related
