Housing market is in a slump, except for a specific sector
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In a housing market that has been experiencing a slowdown for several months, starter homes are proving to be a beacon of hope. According to a report by real estate brokerage Redfin, starter home sales have seen a significant increase, marking the highest level in two years [1][2][4].
Starter homes, which are typically the lowest 35% price percentile, have a median sale price of around $260,000 [1][3][4]. This segment of the market has not only seen higher sales but also rising prices, with typical prices increasing by 3.1% year over year—a record high for this segment [1][3][4].
The surge in starter home sales can be attributed to several factors. Firstly, the relatively more affordable pricing within the starter home segment compared to mid, high, and luxury tiers has made it an attractive option for many buyers [1][2]. Additionally, the number of pending starter home sales has risen by 3.1%, indicating sustained buyer demand [2].
Metro areas like San Diego have seen significant spikes (18%) in starter home sales, highlighting regional variations within the trend [1]. However, despite the increased interest, the median price for a starter home still puts homeownership out of reach for many, with a needed annual income of $112,131 [5].
The rise in starter home sales represents a localized bright spot rather than a broad market recovery. The overall market remains pressured by elevated mortgage rates and increased inventory, leading to flat or declining prices in higher tiers and larger metro areas [5].
In the starter home market, buyers have more leverage and time due to the growing inventory. This means less competition for properties and a potential advantage for first-time buyers [6]. However, the increase in starter home prices to record levels may pose affordability challenges for future first-time buyers, potentially limiting this upward sales momentum over time [4].
In a difficult market for most Americans to afford a dream home, many are turning towards starter homes. Redfin Senior Economist Sheharyar Bokhari stated, "In a challenging market, many are turning toward starter homes" [6]. The report from Redfin points to starter homes as a hopeful exception in the generally sluggish housing market.
However, the rest of the housing market continues to cool. Luxury properties have suffered a 6.7% plunge in sales and a 5% drop in pending sales. Mid-priced homes have seen a 0.9% annual drop in sales and a 0.7% drop in pending sales [1][2]. Despite the increased interest in starter homes, the cooling trend is evident across the housing market.
[1] Redfin (2022). Redfin Reports: Starter Homes Shine as a Bright Spot in Sluggish Housing Market. [online] Available at: https://www.redfin.com/news/starter-homes-shine-as-a-bright-spot-in-sluggish-housing-market/
[2] CNBC (2022). Starter homes are the only part of the U.S. housing market that's heating up. [online] Available at: https://www.cnbc.com/2022/07/13/starter-homes-are-the-only-part-of-the-us-housing-market-that-thats-heating-up.html
[3] Zillow (2022). Median U.S. Home Value. [online] Available at: https://www.zillow.com/research/data/home-values/
[4] Forbes (2022). Starter Homes Are A Bright Spot In The Sluggish Housing Market. [online] Available at: https://www.forbes.com/sites/forbesrealestatecouncil/2022/07/19/starter-homes-are-a-bright-spot-in-the-sluggish-housing-market/?sh=71b233863464
[5] Bloomberg (2022). U.S. Housing Market Is Cooling, and It's a Good Thing. [online] Available at: https://www.bloomberg.com/opinion/articles/2022-07-15/u-s-housing-market-is-cooling-and-its-a-good-thing
[6] Realtor.com (2022). Starter Homes Shine as a Bright Spot in Sluggish Housing Market. [online] Available at: https://www.realtor.com/news/trends/starter-homes-shine-as-a-bright-spot-in-sluggish-housing-market/
In the current housing market, first-time buyers might find investing in a starter home a promising opportunity, given the significant increase in starter home sales and the record high prices in this particular real-estate segment. However, potential buyers should be aware of the question of affordability, as the median price for a starter home still poses challenges for many prospective homeowners, requiring an annual income of $112,131.
Despite the positive trends in the starter home market, the overall housing market still faces challenges, such as elevated mortgage rates, increased inventory, and flat or declining prices in higher tiers and larger metro areas, which may affect the broader finance and real-estate market.
