Rising mortgage rates challenge first-time buyers seeking affordable starter homes

The start of the new year has brought rising mortgage rates, which are nearing 7%, creating challenges for prospective first-time homebuyers. According to a recent analysis by Realtor.com's economic research team, the national household income required to afford a typical starter home is now $70,164. This figure has more than doubled from $32,357 in 2019.

Although median household incomes have increased over the years, reaching $80,610 in 2023 from $68,700 in 2019, they have not kept pace with the rising costs of homes and interest rates. Starter home prices have surged to $292,950 in 2024 from $190,559 five years ago. The increase in mortgage rates from below 4% in 2019 to nearly 7% today has significantly impacted affordability.

Monthly payments on starter homes have risen by 116% since five years ago to $1,754 at current prices and a 7% mortgage rate. To maintain affordability standards, these payments should not exceed 30% of household income.

"Though home price growth has contributed significantly to declining affordability," said Hannah Jones, senior economic research analyst at Realtor.com. "Mortgage rate growth has exacerbated the issue." She added that while starter home prices climbed by 53.7% over the last five years, payments more than doubled due to increasing mortgage rates.

Jones emphasized that "falling mortgage rates are crucial to improved housing affordability."

At the state level, West Virginia requires the lowest household income for affording a starter home at just $31,653. Conversely, Hawaii demands an income of $167,199 for first-time buyers looking at homes priced within the bottom quarter of available listings.

New Hampshire experienced the most significant rise in monthly payments on starter homes since 2019—a surge of 164%. A typical monthly payment there is now $2,600 with a required income of $103,985 for affordability. In contrast, Louisiana saw slower increases but still recorded a rise of 77%, necessitating an income of $46,752 compared to $26,468 in previous years.

These challenges have led many potential first-time buyers away from purchasing homes; only 24% were successful last year—the lowest percentage on record. First-timers often face difficulties such as lower incomes and savings and lack prior home equity.

The analysis defines a starter home as one priced at the area's 25th percentile across 2024 with estimated payments based on a hypothetical scenario involving both past (3.9%) and present (7%) interest rates alongside assumed down payments (10%).