Affordable starter homes may be going 'extinct'
Renters in many markets can no longer afford to make the leap to homeownership, but an increase in build-to-rent inventory could help ease pressure.
Key points:
- Price growth has accelerated faster than wages, putting homeownership out of reach for renters, even in secondary markets.
- A lack of supply due in part to underbuilding has hurt affordability, pushing middle-income buyers to the sidelines.
- But record construction activity in the build-to-rent sector may help slow rent growth and ease pressure on the market as a whole.
It's getting harder for first-time buyers across the country to make the leap toward homeownership, but increasing rental inventory may ease market pressures over time.
A recent analysis from Point2 found that renters in 41% of the largest secondary markets in the U.S. do not earn enough money to afford a mortgage. Secondary markets were defined as "large non-core cities within a metro" such as Everett, Wash. (near Seattle), or Denton, Texas (near Dallas-Fort Worth).
Starter homes becoming 'extinct' due to rapid price growth, underbuilding
Housing affordability has been a top-of-mind concern for many since the pandemic began in March 2020. While much attention has focused on top-tier markets like New York and San Francisco, secondary markets are facing similar challenges because of increased investor activity and even some downsizing by older generations, according to the Point2 report.
As a result, home prices and local wages have become increasingly dislocated. For example, renters in Burbank, California — located just outside of Los Angeles — make a median salary of around $63,000, which is 67% below what is needed to afford a mortgage.
Renters could reasonably afford to buy a home in just 15 of the 100 largest secondary markets Point2 analyzed.
The report pointed to the ongoing shortage of new housing as a significant contributor to the current affordability crisis. In 2001, the share of newly built starter homes — just 13% — was already too low to meet demand, the report noted. By 2021, that percentage had fallen to a mere 7%.
"The once-ubiquitous entry-level home is now almost extinct — just like the dream of comfortably owning one," the analysis concluded.
Middle-income buyers increasingly priced out of the market
A new report from NAR and Realtor.com reached a similar conclusion: There are not enough affordable entry-level homes for middle-income buyers, defined as households earning up to $75,000 — a segment which includes many renters.
Only 23% of currently listed homes would be affordable to those would-be buyers, the report found — a notable change from just five years ago, when middle-income buyers were able to afford half of the homes on the market.
"Ongoing high housing costs and the scarcity of available homes continues to present budget challenges for many prospective buyers, and it's likely keeping some buyers in the rental market or on the sidelines and delaying their purchase until conditions improve," said Danielle Hale, Realtor.com's chief economist and one of the report authors.
Construction of single-family rentals on the rise
The waning supply of starter homes for sale comes as construction activity in the build-to-rent (BTR) sector reached a record high in 2022. More than 14,500 BTR homes were completed, representing a 47% increase from 2021, according to data from RentCafe.
Most BTR homes were built in either Arizona or Texas, states which saw a high level of inbound migration during the pandemic. More than 5,400 BTR homes were built in Phoenix alone compared to the more than 6,900 homes that were built between Dallas and Houston.
Increased rental inventory, slowing rent growth could improve affordability
While the proliferation of BTR homes doesn't help would-be buyers in the short term, it could benefit the overall housing market in the long term. Increasing the supply of rental units could take some pressure off the rental market, slowing rent growth and giving renters an opportunity to save up more money for a future down payment.
The U.S. median rent for studio to two-bedroom properties increased by just 0.3% in April, according to Realtor.com data, one of the slowest rates recorded since the market peaked in January 2022.
However, it remains to be seen just how long that slowdown will last. RentCafe estimates there are more than 44,000 BTR homes under construction in the U.S. But the National Association of Home Builders also reported that BTR construction activity declined by 7% in Q1 2023 compared to Q1 2022.
Meanwhile, investor demand for single-family rental units has also slowed in recent months as economic conditions remain unsteady, NAHB reported. This could lower the number of homes sold to investors in the future, but that doesn't necessarily solve for the affordability concerns shared by renters and buyers alike.
Still, the outlook is looking more hopeful for renters, many of whom will be future first-time buyers. Taylor Marr, Redfin's chief economist, said in mid-May that the U.S. rental market was "tipping back in tenants' favor" as the supply of rental units continues to increase.