The US starter home market is finally changing—but only if you live in these states

Starter homes are finally starting to come back within reach in some parts of the country.

A new report from Realtor.com found that the multi-year shortage in smaller, more affordable homes that appeal to first-time home shoppers is starting to improve – but it depends on where you look.

Aspiring first-time homeowners have had a rough go of it in recent years. The shortage of starter homes hit its peak in 2022, on the tail-end of the pandemic rush to buy homes with record low interest rates. According to Realtor.com’s report, there are around 300,000 fewer homes listed under $350,000 now than there were in the summer of 2019. Then, roughly 55% of listings fell under that key price threshold, compared to just 37.6% now. 

It’s not all bad news. Since 2022’s low point in starter home affordability, the market has added back around 220,000 more starter homes priced below $350,000. The national picture is extremely uneven, but first-time home buyers in the South and West can benefit from starter home prices that have dropped a little from their 2022 highs. In the South, a flurry of construction has pushed 170,000 starter homes into the market since 2022, opening up more options for buyers and helping prices improve by around 3.5%. 

In the West, starter home listings have dropped by 7% since 2022’s high price mark, offering buyers a sliver of relief, especially in Denver, Colorado Springs, and Phoenix. Some Western cities are getting more affordable for first-time buyers, but notoriously expensive West Coast metro areas like Los Angeles and San Francisco aren’t seeing the same trends. 

“Higher rates have kept homeowners stuck in place, but we’re finally seeing cracks in the lock-in effect,” Realtor.com Senior Economist Hannah Jones said. “Every year, more owners hit a life event — a new job, a divorce, a retirement — that forces a move regardless of their mortgage rate, and that’s slowly working supply back into the market.”

Starter home prices are still on the rise in the Midwest and Northeast, with the latter in particular proving impenetrable for first-time home buyers seeking cheaper options. Realtor.com’s report calls the Northeast the “toughest market in the country” for first-time buyers, noting that smaller, more affordable homes are becoming scarcer than ever.

Starter home crisis

Because first-time homeowners generally shop for modest houses that they can afford equity-free, starter homes tend to be on the smaller side. Now, small homes themselves aren’t saving home buyers as much as they used to. Two and three-bedroom homes have risen in price even faster than their larger counterparts with more bedrooms, counteracting some of the savings first-time homeowners might have expected by shopping small. Since 2019, the listing price for the average two bedroom homes has spiked by 44.5%, compared to just 36.9% for a four bedroom home. 

Other factors are cutting into affordability too. As Realtor.com’s latest report observes, first-time buyers now need a household income of around $78,000 to afford the average starter home. In 2019, $43,000 in household income would have made a deal work. During the same time period, the median national household income has only risen by 28% – a sizable gain but one that just isn’t keeping pace with the rising cost of living. And of course, interest rates remain high, cutting deeply into what people can afford to pay on their monthly mortgage payment.