Aspiring homeowners face increasing difficulty in transitioning from renting to owning a starter home, according to a recent report from LendingTree. The study found that in nearly every U.S. state, the median cost of starter homes significantly outpaces the median income of non-homeowners.
Nationally, only 37.6% of renters can afford a starter home, which is typically defined as a residence of 1,500 square feet or less. The median listing price for a starter home has risen sharply, increasing by 48% from approximately $220,000 in 2019 to $325,000 in 2022. This price surge requires a household income of around $62,099, but the median non-homeowner household earns $7,099 less than that.
Rhode Island exhibits the most significant affordability gap, with a median starter home cost of $350,000. To afford a home at this price, an annual income of approximately $107,000 is needed, resulting in a 110% affordability gap when compared to the state's median non-homeowner income of $51,000. California, Hawaii, Colorado, and Massachusetts also report substantial affordability challenges, with median starter home prices exceeding $400,000 and affordability gaps above 80%.
The report identifies several Southern states as offering the best opportunities for first-time homebuyers. Mississippi leads the nation, with 62% of renters able to afford the median starter home in the state, which costs $85,000 and requires an income of $29,523. West Virginia follows, with 58% of renters able to afford its median starter home priced at $90,000, requiring an income of $29,114. Alabama and Arkansas also appear on the list of more affordable states, with 54.1% and 54.3% of renters, respectively, able to afford starter homes in those states.
Other states offering relative affordability include North Dakota, Kansas, Kentucky, and Oklahoma. In contrast, New York shows a considerable affordability gap, with 47.7% of non-homeowners able to afford a starter home priced at $200,000, requiring an income of $63,386.
Matt Schulz, LendingTree's chief consumer finance analyst and author of "Ask Questions, Save Money, Make More: How to Take Control of Your Financial Life," suggests that achieving homeownership may require planning and sacrifice. He also advises prospective homeowners to be realistic about their financial capacity.
To improve the chances of securing a mortgage, experts recommend improving credit scores to lower interest rates, reducing existing debt to improve debt-to-income ratios, and increasing savings to cover closing costs and moving expenses, in addition to a down payment.