The Entry-Level House Has Become A Myth; Few Can Afford Them

Authored by Mike Shedlock via MishTalk.com,

With vanishing inventory, soaring mortgage rates, and stubbornly high prices, there’s little left of the starter home idea…

The once-ubiquitous entry-level home is now mostly a myth. Point2Homes comments on Starter Homes & Where to Find Them. 

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. 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.

Due to the increasing cost of land, as well as zoning restrictions and skyrocketing costs for building materials, the modest, bare-bones homes of yesteryear have become the stuff of myths and legends — the actual unicorns of the real estate market. More elusive than ever, this type of home seems almost extinct. Based on the latest renter income figures, starter home prices and mortgage rates, in October, renters in Los Angeles and New York only earned 30% and 34%, respectively, of the income they would need to buy a starter home.

When Is a Starter Home Not a Starter Home? When It Costs $1 Million.

The median starter home in San Francisco costs as much as the median starter homes in the top 10 most affordable cities combined.

The average renter household made $100,715, but the amount a first-time buyer would need to comfortably cover mortgage payments was $251,190. This means that San Francisco renters are $150,475 (or 60%) short of making their homeownership dreams come true. Moreover, in three other cities (San Jose, CA; Los Angeles; and New York), renters were more than $100,000 short of the amount they would need to cover their mortgage on a starter home. In fact, Los Angeles renters had it the worst: They’re making 70% less than the amount they would need to comfortably cover their monthly mortgage.

Share of Starter Homes 

Key Points

• In 13 more of the 50 largest U.S. cities, renters earned less than half the income they would need to make the move from renters to homeowners.

• Renters in only 4 large U.S. cities (Detroit; Tulsa, OK; Memphis, TN; Oklahoma City) earned 100% or more than what they needed to afford an entry-level home.

• This very short list was all the more shocking because just one month prior, in September, it also included Kansas City, MO. And, one month before that, in August, Baltimore was also affordable for renters who wanted to make the move to homeownership.

• In only 15 of the 50 largest U.S. cities, the price of a starter home still fits the “old” definition of the term: Entry-level houses here were $200,000 or less.

• But even the definition needs to change. It’s now the lower third of homes available. There are no livable $200,000 homes for sale in San Francisco.

Cities Where Renters Can’t Afford a Starter Home

Congratulations to California. It has 8 of the top 15 least affordable cities in the nation for which to try to buy a starter home. 

Affordable Starter Homes 

Point2Homes located four cities where renters can afford a starter home. 

They are Detroit, MI; Tulsa, OK; Memphis, TN; and Oklahoma City, OK. 

In Detroit, Tulsa, and Memphis, renters made $5,901, $5,515 and $3,007, respectively, more than the income needed to cover their first home mortgage expenses.

In Oklahoma City, renters made $140 above the amount required.

The starter home’s new and simplified definition is “the most affordable home in town.” However, this simplified definition does nothing to simplify matters for first-time buyers. The change in definition can’t mask the painful reality: Even starter homes — which should represent the epitome of affordability — are increasingly becoming anything but.

Can You Work From Anywhere?

If you really want a home in a good neighborhood, perhaps to start a family, you may need to think outside California. 

If you are one of those who can work from anywhere, then you might also have a skilled job that pays more than the average renter.

This will open up your horizons a bit more than the above four cities. 

Existing Home Sales Decline 8th Consecutive Month, Down 1.5% Says NAR

Meanwhile, please note Existing Home Sales Decline 8th Consecutive Month, Down 1.5% Says NAR

Mortgage rates are around 7 percent. Few can afford them.

*  *  *

Please Subscribe to MishTalk Email Alerts.