Homes in these cities are more affordable for first-time buyers than they think

by Candyd Mendoza10 May 2019

Traditional measures of affordability such as buying power of first-time home buyers and even the supply of affordable homes can be misleading to prospective first-time homebuyers, according to the findings from First American Financial Corporation’s latest study.

The study, titled “Why Everything You Know About First-Time Home Buyer Affordability is Wrong,” looked into median renter income to analyze affordability for first-time home buyers.

The findings of the study suggested that, instead of worrying about buying power and housing inventory, first-time buyers should “consider cities where the supply of affordable homes is more heavily concentrated.”

Considered the largest generational group in the US, millennials have started to reshape the housing market last year. In fact, over half of all Fannie Mae- and Freddie Mac-sponsored loans are now for first-time home buyers, which are most likely millennials.

“As the surge of millennial demand begins to hit shore, millennial first-time home buyers may want to consider cities that offer a greater supply of affordable homes for median renters,” said First American Chief Economist Mark Fleming.

The top 5 cities with the biggest supply of affordable homes for first-time home buyers are:

  1. Memphis, Tenn. (71%)
  2. Oklahoma City, Okla. (71%)
  3. Pittsburgh, Penn. (69%)
  4. Atlanta, GA. (66%)
  5. Cincinnati, Ohio (66%)

Traditional measures of housing affordability compare household income with the income needed to buy a median-priced home. However, First American’s study revealed that this metric inflates median income levels because it includes existing homeowners who have higher income levels than first-time home buyers.

In Q4 of 2018, household income for owner households was $75,000, compared to $39,000 for renter households.

“As millennials continue to age into their prime home-buying years, first-time homebuyer demand is poised to increase in the years ahead,” said First American Deputy Chief Economist Odeta Kushi. “Yet, traditional measures of affordability are skewed toward existing homeowners who, by definition, can already afford homes. Unlike typical affordability studies, we’ve zeroed in on first-time homebuyers and factored in often overlooked costs like private mortgage insurance and property taxes to provide a clearer assessment of the housing affordability landscape for first-time home buyers.”