According to new data from Zillow, the price of an entry-level home is now above $1 million in more than 100 cities and towns across the country – another sign of the ongoing home affordability issues in the real estate market.
“When affordability gets tight, people want the cheapest,” Orphe Divounguy, a senior economist at Zillow, said in an interview with Yahoo Finance. “And as people wanted more and more entry-level homes, the growth rates of entry-level home prices basically shot up.”
According to Zillow, the average sales price for an entry-level home nationwide is $196,611, making it affordable for a middle-income household. Zillow defines entry-level homes as those in the bottom third of real estate values in a given region.
However, entry-level home prices have increased 54.1% over the past five years, outpacing the 49.1% increase in all home prices over the same period.
At least thirteen states across the country now have at least one city or town offering a home valued at $1 million or more. California leads the way with 71 cities, New York with 11 cities, and Washington with eight cities with expensive housing. Florida, Maryland, and Virginia also have at least one city with expensive housing.
“Delaying the purchase of a home”
The ongoing housing shocks caused by rising home prices, high mortgage rates and a lack of supply have deterred many potential buyers. As a result, home ownership is becoming increasingly out of reach for young Americans. The average age of homebuyers reached 35 last year, a year older than in 2019.
“People are delaying buying a home because it takes longer to save up the money and get on the property ladder,” said Divounguy. “A lot of people want to buy a home. They are out there, but unfortunately they are limited by affordability issues.”
First-time buyers are one of the main groups being displaced, according to Divounguy. The share of buyers buying a home for the first time fell to 29 percent in June, from 31 percent in May, the National Association of Realtors reported.
Housing affordability problems are partly a result of the Federal Reserve’s efforts to curb inflation through tighter monetary policy. The Fed’s benchmark interest rate is currently at a 23-year high. Higher mortgage rates are a major way in which Fed policy has affected the economy.
However, mortgage rates have been declining recently, falling to their lowest levels in over a year as investors price in rate cuts by the Fed. The average interest rate on a 30-year fixed-rate mortgage has fallen to 6.47% from 6.73% last week, Freddie Mac reported.
The Federal Reserve is expected to cut interest rates starting in September. And the expectation that the Fed will make a move has already lowered interest rates, increasing affordability, although lower rates could again put upward pressure on housing prices.
A crucial part of the equation: increasing supply. The pandemic exacerbated housing shortages across the country, which were even more pronounced in Boston, Sacramento and Portland, Oregon, according to a Zillow analysis.
To alleviate the housing shortage, developers have accelerated construction, but the millions of housing units built in the past two years have not been enough to bridge the gap between supply and demand.
At the same time, some of these expensive markets have strict zoning regulations for new housing construction.
“In the short term, a decline in interest rates would be the most aggressive thing that could happen,” said Carl Reichardt, managing director and housing analyst at BTIG, in an interview with Yahoo Finance about solutions.
“In the long run, it would be best if the offering were expanded.”
Dani Romero is a reporter at Yahoo Finance. Follow her on X @daniromerotv.
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