Low-price home affordability increases as mortgage rates ease: Report

Less-expensive starter houses are becoming more affordable as mortgage rates are coming down, a trend that’s being bolstered by a recent boost to household incomes.

Homebuyers have to earn $77,000 to afford homes in the 35th-percentile of house prices or below, which represents a 0.4-percent decrease in the requisite income level since the year prior, according to real estate company Redfin.

“That’s the first annual decline since 2020 thanks to falling mortgage rates,” the company said in a Monday release.

Mortgage rates have been falling generally since October of last year, with the standard 30-year fixed rate mortgage decreasing from 7.8 percent to 6.08 percent over that period, albeit through a fair amount of volatility.

Rates for the 15-year mortgage have dropped from about 7 percent to 5.15 percent over the same time frame.

Mortgage rates move in near-lockstep with the yield on 10-year Treasury bonds, but they are undergirded by the interbank lending rate. The rate remained elevated at 5.33 percent over the past year but was recently dropped by the Federal Reserve to 4.83 percent.

Despite the increase in affordability of less expensive houses, Redfin economist Elijah de la Campa noted that the quality of these houses has declined over time.

“Starter homes aren’t what they used to be,” he said in a statement. “A decade ago, a turnkey four-bedroom house in a nice neighborhood was often considered a starter home, but today, a small fixer-upper condo is often all a first-time homebuyer can afford. The American Dream is changing; for many, it no longer involves a house and a white picket fence.”

U.S. median household income popped in 2023 to $80,610, a 4-percent increase from 2022, representing the first increase since 2019.

Housing prices are still relatively high compared to prices overall since housing inflation tends to trail headline inflation. Seasonally adjusted overall inflation fell to a 2.6-percent annual increase in the August consumer price index, while the owners’ equivalent rent component of the index has fallen to just a 5.4-percent annual increase. 

Owners’ rent inflation ticked upward in August from 5.3 percent to 5.4 percent, its first upward movement since April of last year.