Starter homes in the United States are now getting more affordable after mortgage rates declined and the median household income rose.
Hopeful buyers in the US now need to earn $76,995 to afford a typical starter home with a median price of $250,000, according to an analysis by Redfin. That is the first time the income threshold declined since August 2020, when mortgage rates plummeted to nearly a record low.
In comparison, the income needed to buy a median-priced starter home was $77,343 in August 2023. That said, it is still a significant increase from the income threshold in 2019, before the COVID-19 pandemic, when buyers only needed to earn $39,997.
Why the Income Needed To Buy a Home Fell
Part of the reason why the income threshold fell was the recent dip in mortgage rates. As of the week ending Sept. 26, the 30-year fixed-rate mortgage trended down to 6.08%, which is the lowest level in two years, per Freddie Mac. Those rates fell generally since October 2023, when the standard contract rate for the 30-year term peaked at 8%.
The 15-year mortgage term rates also dropped to 5.16% from about 7% in the same period.
Read also: Fed Rate Cuts Will Lower Mortgage Rates but Won't Fix the US Housing Affordability Crisis: Report
Furthermore, the estimated median US household income also rose to $83,853 in August 2024 from $79,689 in the same month last year.
The Definition of Starter Homes Has Changed
Despite an improvement in affordability, Redfin economist Elijah de la Campa said the quality of starter homes has declined in recent years.
"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," he said.
Moreover, starter homes are still much more expensive than before the COVID-19 pandemic. In August 2019, a typical starter home had a median price of $165,500. This increased to $240,000 last year and $250,000 in August 2024.
The report noted that the share of income that households need to spend to buy a starter home also increased from 19.1% in August 2019 to 27.5% this year.
