In America’s largest cities, starter homes move closer to extinction

After the most recent hike in mortgage rates, renters in 46 of the 50 largest cities in the U.S. are unable to afford a starter home, according to new research from Yardi Matrix division Point2.

That’s up from 44 of 50 only two months ago, when interest rates hovered around 5.5%. But in October, when interest rates inched closer to 7%, Kansas City, Missouri, and Baltimore were the two newest cities to join the ranks of the unaffordable.

Given the local median price of a starter home and assuming a 20% downpayment, renters in Kansas City now make only 93% of the income required to purchase a “starter home” with a 7% mortgage rate, while those in Baltimore top out at 91% of the required income.

The only large cities where so-called starter homes are affordable for renters are Detroit (where renter households make 131% of the income required to buy); Tulsa, Oklahoma (119%); Memphis (111%); and Oklahoma City (100%).

In several of the nation’s largest markets, renters aren’t anywhere close. In Los Angeles, the median income for renter households is a scant 30% of the income required to buy a starter home with a 7% rate. In nearby Long Beach, California, it’s 36%. In the San Francisco Bay Area, much of the same situation exists: In San Francisco, San Jose and Oakland, the typical renter earns a respective 40%, 37% and 37% of the income needed to purchase a starter home.

It’s a far cry from the old days of starter homes, when 70% of all new home construction fell under the umbrella of single-family houses of 1,400 square feet or less that started at $6,990. That, however, was in the 1940s. Four decades later, this share had dropped to 40%. And in 2019, only 7% of homes fell under the same category.

“Further proof that starter homes are vanishing is their changing definition,” the Point2 study stated. “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.”


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