Homes in major metropolitan areas were difficult to find and largely priced out of reach for first-time buyers in the first quarter of 2020.
In 20 of the 50 largest U.S. metros, list prices were more than five times the median first-time home buyer income in January through March. Moreover, the number of active listings dropped by 19% compared with the first quarter of 2019, placing significant obstacles in the way of new buyers as the 2020 season began.
First-time home buyers face unique challenges. They’re generally younger than repeat buyers, so they have lower incomes and potentially less robust credit history, and they may not qualify for the best mortgage rates. When these factors are compounded by high sticker prices, low supply — and then the economic impact of a global pandemic — these buyers stand to be pushed out of the market altogether.
Home affordability can be measured by comparing incomes with home prices: The higher this ratio, the less affordable homes are. In this quarterly report, we compare the median incomes of Americans ages 25-44 — median first-time homebuying age is 33 — with a quarterly average of median home list prices in the most populous metropolitan areas. The analysis helps quantify just how realistic the dream of homeownership is for first-time buyers.
In this inaugural edition, we cover a period that began with a strong market and ended with widespread uncertainty. As the first quarter came to a close, what seemed to start off as a hot homebuying market was halted in its tracks by a pandemic with economic effects yet to be fully realized.
To be clear, this first-quarter data doesn’t describe explicit effects of the pandemic, as any changes in late March weren’t enough to impact monthly or quarterly figures. But it does provide a starting point from which to analyze the potential effects of the coronavirus in future quarterly reports.
Nationwide, the affordability ratio was 4.5 in the first quarter of 2020; that is, first-time home buyers could expect to see homes listed at about 4.5 times their income, on average. However, as the map above shows, there were significant variations by location.
We acknowledge first-time buyers may be in the market for homes priced lower than the median — starter homes, so to speak — but looking at a three-month average of median prices provides a good perspective of what new buyers see when they look at local listings.
» MORE: Compare the best lenders for first-time home buyers
Home list prices dwarf incomes
Everything is more expensive in highly populated areas, and that includes homes. But if incomes aren’t proportional to home prices, then homeownership in these areas becomes more difficult for lower and middle earners. For example, though the San Francisco metro area has one of the highest average list prices for the quarter ($938,347), it also has one of the highest median incomes for first-time home buyers ($131,460). This makes it potentially more affordable than the San Diego metro area, where despite having an average list price roughly 21% less, its first-time home buyers are earning 37% less.
One rule of thumb when it comes to homebuying affordability is to look at homes priced at about three times your annual income. A lack of affordable homes for sale likely pushes folks, and especially first-time buyers with lower incomes, to stretch this recommended guideline.
Only one metro area in our analysis — Pittsburgh — had a quarterly average list price at or below three times the income of first-time home buyers. Three others were close: Quarterly list prices in Buffalo, Cleveland and St. Louis were 3.1 times median income. Twenty-eight had affordability ratios above the national average (4.5), and 10 had list prices over six times the local income for potential first-time buyers.