As interest rates rise — but home prices aren’t falling proportionately to interest rate hikes — it takes more monthly income than ever to purchase a home. Black Knight, a data mortgage company, reported that interest and mortgage payments on a median priced home are up $930 per month, or 73%, from last time this year.

                By                    Dawn Allcot

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The increase is especially relevant when it comes to starter homes. The number of cities where renters and prospective homebuyers can find an affordable house is shrinking monthly. Increasing mortgage rates and vanishing inventory is to blame, per Point2 Homes.

Increasing costs for land and building materials, along with zoning restrictions, have reduced the inventory of new starter homes. In 2019, only 7% of all new homes built could be defined as starter homes — smaller, basic houses that are affordable to first-time buyers. Today’s definition of a starter home has changed slightly, too. Now, any home falling within the 5th to 35th percentile in cost is considered a “starter,” according to Point2Homes.

And, it’s not just first-time homebuyers clamoring for these houses. Baby boomers looking to right-size their living space, second homebuyers, and real estate investors are also looking for these type of homes, compounding the shortage.

How Bad Is the Starter Home Shortage?

With starter homes in short supply, the price of this kind of property is rising quickly. In Los Angeles and New York, renters only earn 30% and 34% of the income they need to buy a starter home. In another 13 of the 50 largest U.S. cities, renters earn less than 50% of what they need to buy one of the cheapest houses available.

Where Can You Afford a Starter Home?

There are still four U.S. cities where starter homes are affordable based on salaries in the region. These cities are:

  • Detroit, Michigan.Tulsa, Oklahoma.Memphis, Tennessee.Oklahoma City, Oklahoma.

If you live in one of these areas or are willing to relocate, your odds of finding a starter home increase dramatically. Point2Homes research showed that renters in these cities earned 100% or more of what they needed to afford a starter home.

The list, however, is shrinking. In September, Kansas City, Missouri, was also included on the list of affordable cities for starter homes. And, in August, Baltimore, Maryland, was also deemed affordable in terms of starter homes.  

How to Afford a Starter Home

To improve your odds of mortgage approval, take a look at your credit reports, correct any errors you may find, and work on paying down debt and making on-time payments to increase your credit score. Having a higher credit score can also help you snag a lower interest rate, which will reduce your monthly payments.

You may also consider shopping for a starter home in a suburb or rural area, where home prices trend lower. With the remote work trend continuing post-pandemic, and 16% of all U.S. companies operating fully remotely, according to Zippia, it may be possible to work in the city and live in the suburbs — or even live in a different state entirely.

For instance, if you work in Silicon Valley or New York City, that salary will go further in Tennessee, and you may be able to afford a starter home within or just outside of Memphis.

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Of course, this decision may not be the best choice for everyone, but if you are determined to become a homeowner in 2022 or 2023, you might have to be willing to relocate.

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