As National Homeownership Month comes to a close, it’s important to examine the current challenges facing the housing market. Nationally, housing affordability has declined compared with one year ago, especially for potential first-time home buyers. 

According to our First Time Home Buyer Outlook Report, the median renter, who can also be considered the median first-time home buyer, could only afford 29 percent of homes for sale nationally in the first quarter of 2024, which is down from 34 percent a year ago. 

The decline in affordability is in part due to an increase in mortgage rates. The 30-year, fixed mortgage rate averaged 6.75 percent in the first quarter of 2024, an increase of 0.4 percentage points over the average mortgage rate in the first quarter of 2023. As a result, nationally renter house-buying power declined by 2 percent compared with a year ago. Median house prices also increased over the same period, further contributing to a decline in affordability. Mortgage rates are a powerful driver of affordability, but incomes and house prices also make a difference, especially on a market-by-market basis.

“While housing affordability is low for potential first-time home buyers, slowing price appreciation and lower mortgage rates could help – so the dream of homeownership isn’t boarded up just yet.”

First-Time Home Buyer Affordability Depends on Two Factors

For potential first-time home buyers, who by definition are renters, affordability is a function of their house-buying power and the corresponding share of homes for sale that are within their reach. In our analysis, a potential first-time home buyer’s house-buying power – how much home they can afford – is based on the renter’s household income, the prevailing 30-year, fixed mortgage rate, and the assumption that one-third of pre-tax income is used for a mortgage with a 5 percent down payment. The share of homes for sale that are affordable to the median renter in any given market is estimated by comparing data on home sale transactions from First American Data & Analytics to the median renter’s house-buying power.

An affordable market is defined as a market where the median, or 50th percentile, renter can afford 50 percent or more of the homes for sale. If a potential buyer can afford their “share” of homes for sale, it suggests that there is enough supply at the right price to meet demand. Using that definition, first-time home buyer affordability can be compared over time and between markets.

Where Can First-Time Home Buyers Find the Greatest Supply of Affordable Homes?

Nationally, by this measure, only one market was affordable to the median renter in the first quarter of this year: Memphis, Tenn., where 55 percent of homes were affordable to the median renter. There were a few markets that were on the verge of being considered “affordable,” including Cleveland (49 percent), Louisville, Ky. (47 percent), and Pittsburgh (45 percent). 

The least affordable markets were Los Angeles (1 percent), San Diego (2 percent), San Francisco (3 percent), San Jose, Calif. (3 percent), and Sacramento, Calif. (4 percent). In the least affordable market, Los Angeles, the median renter’s house-buying power was just over $280,000, while the median sale price was $920,000.

Markets with higher shares of affordable homes for sale tended to have lower median house prices, but the trend was not universal. Some markets with relatively high median house prices, such as Baltimore and Chicago, were considered more affordable, while lower-priced markets, such as Oklahoma City and St. Louis, Mo. were less affordable. Home prices alone do not accurately indicate affordability – it's all about the share of homes for sale that are within the renter’s house-buying power.

Where is Housing Affordability Headed?

Rising prices and elevated mortgage rates have resulted in a challenging market for potential first-time home buyers, but there is a light at the end of the tunnel. According to our First American Data & Analytics House Price Index, annual house price growth has slowed for five consecutive months. Furthermore, although housing supply is still historically low, the slight uptick in inventory compared to a year ago might help to further ease some pressure on home prices. 

Finally, the Federal Reserve has signaled that a rate cut may be in store for this year if inflation continues to cool, which may lead to an easing in mortgage rates. While housing affordability is low for potential first-time home buyers, slowing price appreciation and lower mortgage rates could help – so the dream of homeownership isn’t boarded up just yet.

About the First-Time Home Buyer Outlook Report

Housing affordability is often reduced to a comparison of household income to house prices. This overlooks what matters to potential buyers – their house-buying power. First American’s proprietary First-Time Home Buyer Outlook Report examines first-time home buyer affordability by considering the share of homes for sale that are within the renter’s house-buying power. The larger the share of homes for sale that first-time home buyers can afford to buy, the more affordable the market.

First-time home buyer house-buying power is based on the median renter household’s income, the prevailing 30-year, fixed mortgage rate, the most recent year’s property tax rate for the geography of the renter, and assumes a fixed cost for private mortgage insurance, a 5 percent down payment and that one-third of their pre-tax income is used for the mortgage. The share of homes for sale is based on First American Data & Analytics’ aggregation of publicly recorded home sales. The median renter household’s income is derived from the 2023 Annual Social and Economic Supplement (ASEC) of the Current Population Survey, reporting income for the year 2021. It was assumed that household income increased by 4.5 percent between 2022 and 2023, based on the average annual percent increase in average hourly earnings multiplied by average weekly hourly worked between 2021 and 2023. This derived income was used in calculating renter house-buying power.