As mortgage rates continue to rise, affordability has decreased significantly for all homebuyers. But affordability for the potential first-time homebuyer, those currently renting, have faced the most pressure, according to First American economist Ksenia Potapov.
“Nationally, affordability for potential first-time homebuyers declined 19 percentage points in June 2022 compared with a year earlier as rapid house price appreciation outpaced consumer house-buying power, which was already falling due to rising mortgage rates,” Potapov said in a release. “However, the affordability outlook remains vastly different based on where a potential first-time homebuyer lives. We can measure affordability for all renter households in top U.S. markets based on their household income and the share of homes for sale they can reasonably afford to buy.”
Housing affordability for first-time buyers varies in each market because it is dependent on both the housing supply at each price point and the renter’s house-buying power.
“For example, a renter with household income at the 30th percentile of the income distribution can afford 30 percent of the homes for sale in their market. This represents renter affordability equilibrium,” she said.
The shape of the affordability curve can provide a lot of information about a market, Potapov said. Markets are generally either affordable for all potential first-time homebuyers, affordable for some and unaffordable for all.
“In Buffalo, potential first-time homebuyers along nearly the entire income distribution can find more than their share of homes to buy that are within their house-buying power,” she said. “In Phoenix, New York and Austin, Texas, renter households across the income distribution are unable to afford an equal share of homes to buy. And, in Pittsburgh, San Antonio and Cincinnati, only some households can find an equal share of homes to buy, usually at the upper range of the income distribution.
“In San Antonio, renters who make less than $79,000 cannot afford their share of homes for sale, while renters who make more than $79,000 can afford more than their share.”
The top 10 cities where renters in the 30th percentile (lower income households) could find the largest supply of homes to purchase in June were Buffalo, N.Y. (25 percent), Pittsburgh (24 percent), Oklahoma City (20 percent), Cincinnati (17 percent), Milwaukee (17 percent), Detroit (15 percent), Philadelphia (14 percent), Birmingham, Ala., (13 percent), Cleveland (13 percent) and Charlotte, N.C. (12 percent).
“The impact of the combined affordability headwinds of rising mortgage rates and rapid house price appreciation is evident. None of the markets on the list offer renters in the 30th percentile an equal or greater share of homes to buy,” Potapov said. “A year ago, in the third quarter of 2021, nine markets met that threshold. However, in the most affordable market, Buffalo, a renter in the 30th percentile, with a household income of $29,800 and a house-buying power of $148,400, could still afford 25 percent of homes for sale.
“The adage that real estate is local rings true but, even within a single city, affordability can look radically different depending on where one sits in the income distribution,” she added. “When considering where the dream of homeownership may be more attainable, potential first-time homebuyers should look to the share of affordable homes available to them in each market.”