Starter Homes & Where to Find Them: The Once-Ubiquitous Entry-Level House Is Becoming the Stuff of Myths

Vanishing inventory is just the tip of the unaffordability iceberg as daunting mortgage rates crush renters' homeownership goals overnight.

by Andra Hopulele
12,236 views
9 min. read
  • 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.
  • 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.

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.

Further proof that starter homes are vanishing is their changing definition: They used to be the small, super-affordable houses that a young person or family could buy in order to get on the property ladder. But now, they’ve come to represent simply the cheapest homes available in a market, or homes that fall within the 5th to 35th percentile price range. And it’s not just renters and young families who are vying for them: Downsizing baby boomers, second homebuyers and property investors are in direct competition with first-time buyers for this dwindling housing segment.

However, scarce inventory is just the tip of the unaffordability iceberg: Rapidly rising prices and interest rates have even more serious consequences. So, to gauge the effect of the mortgage rate hikes on affordability, Point2 analysts reviewed data on the median price of a starter home and renter households’ median incomes in the 50 largest U.S. cities. They discovered that renters’ homeownership dreams don’t match the reality in almost any of the large U.S. housing markets.

 

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.

As expected, the quickly rising interest rates took a large bite out of renters’ already limited buying power in America’s most expensive markets. 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.

For instance, in San Francisco, 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.

If affordable cities are becoming unaffordable overnight, unaffordable urban hubs are simply moving further into the realm of unaffordability. To that end, in October, renters in 15 cities earned less than 50% of what they needed to afford a starter home. This was much more than in August, when renters in only 11 cities were in this situation.

Granted, that’s not to say that renters who earn more than 50% of the income needed to afford an entry-level home are in an enviable position. In fact, their situation might be worse than that of renters in completely unaffordable markets, who definitely know that they aren’t — and probably never will be — able to afford a home.

Earning 70% or 80% of the income they need to comfortably cover their monthly payments keeps renters in a tense, frozen decisional space — their very own housing limbo. In this case, the question of whether they should or could make the switch to homeownership doesn’t have a clear no or a clear yes.

 

What a Difference a Month Makes: Affordability Window Closes Overnight for Renters in Kansas City, MO & Baltimore

In August, when interest rates were hovering around 5.5%, renters in 6 large U.S. cities could comfortably afford to buy a starter home. One month and an interest hike later, that number swiftly fell to 5… and then 4.

What does it mean that renters could comfortably afford to buy a starter home? Well, the accepted rule is that a mortgage payment should not exceed 30% of your gross monthly income. Accordingly, after calculating how much the mortgage would be in each of the 50 cities (taking into consideration the median price of a starter home and assuming a 20% down payment), we calculated a renter’s required income and compared it to their actual income. The result? Renters in only four cities earned enough to cover their monthly mortgage payments.

Currently, the average renter in Tulsa, OK; Detroit; Memphis, TN; and Oklahoma City earns more than what they would need to buy a starter home and transition to homeownership. For example,  a renter in Tulsa would need to make close to $30,000 to cover the monthly mortgage payments for the median starter home, but renters here made $35,000, on average.

Detroit; Tulsa, OK; and Memphis, TN, stood out for their affordability mostly because the median starter home in all three cities was less than $100,000. However, they were also on the podium because renter household incomes here were high enough to cover the mortgage, taxes, and insurance, as well. In fact, in these three cities, renters made $5,901, $5,515 and $3,007, respectively, more than the income needed to cover their first home mortgage expenses.

Similarly, renters in Oklahoma City also earned a little more than enough to move to homeownership: They made $140 above the amount required.

In August, when interest rates hovered around 5.5%, six markets were affordable for renters. One month later, rates reached 6% and only five cities remained on the affordable cities list. Then, in October, when the interest rate went from 6% to 7%, only four cities were left in the enviable category of markets with affordable starter homes for renters who want to become homeowners: The affordability door closed for renters in two large cities: Kansas City, MO, and Baltimore were drawn into unaffordable territory. They joined the other 44 large cities where renters earned only 93% or much less than what they would need to comfortably afford to pay their monthly mortgage.

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.

 

Below is all of the data used in the study. Use the filters to rank the 50 largest U.S cities based on the variable that interests you, be it starter home prices, renter income, down payment, loan amount, or income needed to afford an entry-level home.

CityStateMedian Starter Home Price SeptemberStarter Home Down Payment (20%)Loan AmountYearly Payment (6% rate)Yearly Income Required (6%)Yearly Payment (7% rate)Yearly Income Required (7%)Median Income (Renter Household)Renter Household Income as % of Income Required (with 6% rate)Renter Household Income as % of Income Required (with 7% rate) 
DetroitMI $48,129 $9,626 $38,503 $5,427 $18,091 $5,731 $19,103 $25,004 138%131%
TulsaOK $95,481 $19,096 $76,385 $8,255 $27,515 $8,857 $29,524 $35,039 127%119%
MemphisTN $87,174 $17,435 $69,739 $7,839 $26,131 $8,390 $27,966 $30,973 119%111%
Oklahoma CityOK $126,442 $25,288 $101,154 $10,323 $34,411 $11,121 $37,071 $37,211 108%100%
Kansas CityMO $139,010 $27,802 $111,208 $11,460 $38,201 $12,338 $41,126 $38,383 100%93%
BaltimoreMD $127,410 $25,482 $101,928 $11,154 $37,179 $11,958 $39,860 $36,380 98%91%
PhiladelphiaPA $149,657 $29,931 $119,726 $11,745 $39,152 $12,690 $42,300 $36,648 94%87%
LouisvilleKY $149,240 $29,848 $119,392 $11,643 $38,809 $12,585 $41,949 $35,431 91%84%
IndianapolisIN $146,240 $29,248 $116,992 $11,574 $38,580 $12,497 $41,657 $34,918 91%84%
MilwaukeeWI $111,928 $22,386 $89,542 $10,786 $35,954 $11,493 $38,309 $31,698 88%83%
ColumbusOH $167,046 $33,409 $133,637 $14,469 $48,228 $15,523 $51,743 $41,628 86%80%
Virginia BeachVA $267,442 $53,488 $213,954 $19,453 $64,845 $21,141 $70,472 $56,562 87%80%
JacksonvilleFL $204,221 $40,844 $163,377 $15,272 $50,908 $16,561 $55,205 $41,010 81%74%
OmahaNE $183,514 $36,703 $146,811 $15,803 $52,676 $16,961 $56,537 $40,315 77%71%
HoustonTX $196,661 $39,332 $157,329 $16,814 $56,048 $18,056 $60,186 $41,364 74%69%
ChicagoIL $204,696 $40,939 $163,757 $17,740 $59,133 $19,032 $63,440 $43,591 74%69%
DallasTX $221,140 $44,228 $176,912 $18,477 $61,590 $19,873 $66,243 $45,047 73%68%
Colorado CityCO $261,335 $52,267 $209,068 $18,342 $61,140 $19,991 $66,638 $45,084 74%68%
MinneapolisMN $234,576 $46,915 $187,661 $18,114 $60,379 $19,594 $65,314 $43,310 72%66%
El PasoTX $156,454 $31,291 $125,163 $14,252 $47,507 $15,240 $50,799 $32,231 68%63%
Fort WorthTX $232,034 $46,407 $185,627 $19,537 $65,122 $21,001 $70,004 $44,238 68%63%
CharlotteNC $300,505 $60,101 $240,404 $21,831 $72,770 $23,728 $79,093 $49,023 67%62%
Washington, D.C. $412,051 $82,410 $329,641 $27,745 $92,483 $30,346 $101,153 $61,871 67%61%
AtlantaGA $271,427 $54,285 $217,142 $19,935 $66,451 $21,649 $72,162 $42,359 64%59%
San AntonioTX $217,069 $43,414 $173,655 $18,493 $61,645 $19,864 $66,212 $38,554 63%58%
PhoenixAZ $304,227 $60,845 $243,382 $20,985 $69,951 $22,906 $76,352 $43,866 63%57%
RaleighNC $323,877 $64,775 $259,102 $23,042 $76,806 $25,086 $83,621 $47,469 62%57%
New OrleansLA $178,642 $35,728 $142,914 $13,302 $44,340 $14,430 $48,098 $27,017 61%56%
TampaFL $279,676 $55,935 $223,741 $20,322 $67,741 $22,088 $73,626 $40,006 59%54%
ArlingtonTX $269,683 $53,937 $215,746 $22,434 $74,780 $24,136 $80,454 $42,826 57%53%
MesaAZ $328,514 $65,703 $262,811 $22,526 $75,088 $24,600 $82,000 $43,177 58%53%
NashvilleTN $344,349 $68,870 $275,479 $23,876 $79,586 $26,049 $86,831 $45,469 57%52%
Las VegasNV $314,090 $62,818 $251,272 $21,611 $72,037 $23,594 $78,646 $40,842 57%52%
DenverCO $433,502 $86,700 $346,802 $29,059 $96,862 $31,795 $105,983 $53,420 55%50%
AlbuquerqueNM $244,924 $48,985 $195,939 $18,373 $61,244 $19,919 $66,398 $33,453 55%50%
TucsonAZ $246,408 $49,282 $197,126 $18,203 $60,678 $19,759 $65,862 $31,885 53%48%
SacramentoCA $392,158 $78,432 $313,726 $27,389 $91,295 $29,864 $99,547 $47,524 52%48%
FresnoCA $276,887 $55,377 $221,510 $19,887 $66,291 $21,635 $72,117 $34,357 52%48%
PortlandOR $431,274 $86,255 $345,019 $30,729 $102,431 $33,452 $111,505 $49,643 48%45%
SeattleWA $645,382 $129,076 $516,306 $44,635 $148,782 $48,708 $162,361 $70,164 47%43%
AustinTX $454,836 $90,967 $363,869 $35,910 $119,698 $38,781 $129,268 $55,640 46%43%
BostonMA $517,312 $103,462 $413,850 $35,024 $116,748 $38,290 $127,632 $53,188 46%42%
San FranciscoCA $1,048,498 $209,700 $838,798 $68,739 $229,129 $75,357 $251,190 $100,715 44%40%
San DiegoCA $649,996 $129,999 $519,997 $43,837 $146,122 $47,940 $159,799 $63,390 43%40%
MiamiFL $356,643 $71,329 $285,314 $25,417 $84,723 $27,668 $92,227 $36,532 43%40%
San JoseCA $933,402 $186,680 $746,722 $62,124 $207,081 $68,016 $226,720 $84,730 41%37%
OaklandCA $622,951 $124,590 $498,361 $42,332 $141,106 $46,264 $154,213 $57,431 41%37%
Long BeachCA $562,462 $112,492 $449,970 $38,047 $126,823 $41,597 $138,658 $50,566 40%36%
New YorkNY $544,074 $108,815 $435,259 $43,469 $144,895 $46,903 $156,343 $52,724 36%34%
Los AngelesCA $682,002 $136,400 $545,602 $45,776 $152,587 $50,081 $166,937 $49,568 32%30%

 

 

Methodology

  • For this study, we took into consideration only the median value of starter homes in all 50 cities included in the analysis, which means there are still cheaper options that could be more affordable.
  • We also looked at renter household incomes in the 50 largest U.S. cities, based on population data from the U.S. Census Bureau.
  • We analyzed median starter home prices from Zillow. Starter homes were considered to be the homes valued in the bottom one-third of all available homes for sale — that is, the homes that fell within the 5th to 35th percentile range of a given region, per Zillow methodology and data.
  • To calculate the income required to afford the monthly mortgage payments on the median-priced starter home, we considered that the monthly mortgage should not represent more than 30% of a renter household income, assuming a 20% down payment was already covered and the loan was made based on a 5.5% (August rate), a 6% (September rate) and a 7% (October rate), 30-year fixed-rate mortgage.
  • We also took into consideration property taxes and insurance costs.
  • We then compared renters’ actual average income to the income they would need in order to afford payments on  a starter home in a given city, if they were to buy in August, September or October.

Disclaimers:

  • The assessed value used for calculating the property tax may be subject to various exemptions, depending on local/zonal policies.
  • Insurance costs may differ, depending on home value, home condition and personal credit score.

 

Fair Use

We encourage and freely grant you permission to reuse, host, or repost the story in this article. When doing so, we only ask that you kindly attribute the authors by linking to Point2Homes.com or this page so that your readers can learn more about this project, the research behind it and its methodology.

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