US First-Time Buyers Face $31,000 Income Gap for Starter Homes

Key points

• The monthly mortgage payment for a typical US starter home is $2,158, requiring an income of $103,584 to afford.
• The median income for first-time buyers is currently around $72,100, creating a substantial affordability gap.
• The National Association of Realtors defines a starter home as one priced at 85% of the median home value, but first-time buyers can only afford homes at about 60% of that price.
• The first-time buyer affordability index has remained below 100 since 2021, indicating that median-income families cannot afford starter homes.
• Approximately 80% of US metropolitan areas have affordability scores below 100 for first-time buyers.
• High rental costs prevent potential buyers from saving for down payments, while mortgage rates have risen to 7.28%.

Background

This trend follows a period of slowing existing-home sales in the US, where inventory rose to a 4.9-month supply but affordability remained a major hurdle. First-time buyers accounted for only about 30% of purchases, below historical levels. In the UK, Prime Minister Andy Burnham recently launched the 'Your First Home' scheme to assist buyers with low deposits, highlighting global efforts to address housing accessibility. Meanwhile, concerns about new-build quality have emerged, with independent inspectors reporting widespread defects, potentially affecting buyer confidence.

Why it matters

The widening affordability gap threatens to exclude a generation from homeownership, potentially exacerbating wealth inequality and housing instability. As starter homes become long-term residences for older owners, the supply of entry-level homes may not meet the needs of younger buyers, despite an increase in the number of starter homes available. This could lead to prolonged rental markets and delayed family formation, with broader economic implications.

What to watch

Policymakers and industry leaders may need to address the root causes of the affordability gap, including high rental costs and mortgage rates. Monitoring the affordability index and metro-area data will be crucial to understanding regional variations and potential policy interventions. The trend of starter homes becoming long-term homes may require new strategies to increase the supply of entry-level housing.