Buyers are snatching up starter homes
Pending sales for all other tiers were down compared to last year, but entry-level homes attracted significant buyer interest in July.
While the market remains tepid overall, starter homes are drawing more interest as mortgage rates trend lower and inventory rises.
Pending sales for starter homes jumped more than 10% in July year-over-year, according to the latest Redfin report, reaching the highest level in nearly two years. That's in stark contrast to pending sales for all other tiers, which fell by between 6-10% over the same time period.
Sale prices of entry-level homes were also up, but increased at a slower pace than other home segments, a sign that inventory and demand are more balanced in the lower price tiers. Redfin defined starter homes are those with a sale price in the 5th-35th percentile.
Redfin Senior Economist Sheharyar Bokhari said the recent drop in mortgage rates is a big factor. First-time buyers make up a significant portion of the starter home market and are more sensitive to rate drops.
"More buyers means more sales, but so far we aren't seeing prices skyrocket, because the rising number of homes hitting the market is enough to satisfy the increased demand," Bokhari said.
Starter home listings way up: Supply appears to be a factor in the uptick in sales. Compared to a year ago, active listings in July were up 18.9% for starter homes, well above the increases for the luxury (up 9% year-over-year), middle (up 4.1%) and upper tiers (up 1.6%).
Texas offers the most choices: Among the 50 largest metro areas, San Antonio had the biggest year-over-year growth in active listings, rising 50.2%. That's followed by Fort Worth (up 49.6%) and Tampa (up 48.1%). The only market to see a decline in active listings was Milwaukee, where listings were down 4.1% year-over-year.
Pricey markets had more sales: Perhaps surprisingly, the two most expensive markets analyzed had the biggest jump in closed sales. Starter home sales were up 18.7% in San Francisco and up 14.5 in San Jose — cities where the median sale price for a starter home is roughly $950,000.
Northwest buyers wasted no time: Starter homes in Seattle sold the fastest, sitting on the market for a median of just seven days, even though buyers typically had to shell out around $555,000. On the opposite side of the country, starter homes in Fort Lauderdale — which sell for less than half the price — stayed on the market for 81 days.
Still a ways to go: The boost in pending sales for starter homes has not been enough to jumpstart the overall real estate market, however. Even though affordability improved in July, it remains 92% lower compared to pre-pandemic levels in February 2020, according to a report from First American.
"Affordability may be improving in more markets, but potential home buyers have long memories and homes everywhere are significantly less affordable than before the pandemic," said Mark Fleming, chief economist at First American.
"Modest improvements may not be enough to significantly boost demand, as household incomes remain stretched relative to mortgage payments."