As National Homeownership Month wraps up, it’s essential to take a closer look at the current hurdles in the housing market, particularly for first-time home buyers. Across the U.S., housing affordability has taken a hit compared to last year, with first-time buyers feeling the pinch the most.
According to our First-Time Home Buyer Outlook Report, the median renter—who is often the typical first-time home buyer—could only afford 29% of homes on the market in the first quarter of 2024. This is a notable decline from 34% the year prior.
This drop in affordability is primarily due to rising mortgage rates. In the first quarter of 2024, the 30-year fixed mortgage rate averaged 6.75%, up by 0.4 percentage points from the same period in 2023. As a result, renters’ purchasing power declined by 2% over the past year. At the same time, median home prices continued to rise, further impacting affordability. While mortgage rates are a key driver, income levels and local home prices also play a significant role, particularly on a market-by-market basis.
“Although housing affordability remains challenging for first-time home buyers, slowing price increases and the potential for lower mortgage rates offer hope—homeownership is still within reach,” experts say.
What Drives Affordability for First-Time Home Buyers?
For potential first-time buyers—most of whom are renters—affordability depends on two main factors: their house-buying power and the percentage of homes for sale within their budget. A first-time buyer’s purchasing power is calculated based on household income, the prevailing 30-year fixed mortgage rate, and the assumption that one-third of their pre-tax income is dedicated to mortgage payments with a 5% down payment.
An “affordable” market is defined as one where the median renter can afford at least 50% of the homes for sale. By analyzing home sale data and comparing it to the median renter’s purchasing power, it becomes possible to evaluate affordability over time and across different regions.
Where Can First-Time Home Buyers Find Affordable Homes?
Nationally, only one major market was considered affordable for the median renter in early 2024: Memphis, Tennessee, where 55% of homes were within reach of the typical renter. Several other cities were close to this threshold, including Cleveland (49%), Louisville (47%), and Pittsburgh (45%).
On the other end of the spectrum, the least affordable markets were in California, with Los Angeles (1%), San Diego (2%), San Francisco (3%), San Jose (3%), and Sacramento (4%) leading the list. In Los Angeles, for example, the median renter’s purchasing power was just over $280,000, while the median sale price was a staggering $920,000.
Interestingly, not all affordable markets have low home prices. In cities like Baltimore and Chicago, higher-than-average home prices were offset by higher median incomes, making them more affordable. Conversely, markets like Oklahoma City and St. Louis, with lower overall prices, were less affordable due to a smaller share of homes being within the median renter’s budget.
What’s Next for Housing Affordability?
While the housing market remains tough for first-time buyers, there are signs that relief may be on the horizon. According to First American’s House Price Index, annual home price growth has slowed for five consecutive months. Additionally, a slight increase in housing inventory compared to last year could help reduce some pressure on prices.
The Federal Reserve has also hinted at the possibility of a rate cut later this year if inflation continues to cool, which may help ease mortgage rates. While the current landscape remains challenging, these developments could make homeownership more attainable for first-time buyers in the near future.
About the First-Time Home Buyer Outlook Report
The First-Time Home Buyer Outlook Report focuses on what matters most to prospective buyers: their purchasing power. This proprietary analysis considers the share of homes for sale that are within the budget of the median renter. By looking at income, mortgage rates, and home prices, the report offers a comprehensive view of housing affordability for first-time buyers.
By understanding where affordability stands and tracking how these factors evolve, first-time home buyers can make informed decisions and navigate a challenging but potentially promising housing market.
