Supply is dwindling, prices are rising. Where can FTHBs find an in?
Recent research by NerdWallet has identified five metro areas where struggling first-time home buyers may still be able to get their foot in the door. With COVID-19 forcing millions of Americans to reconsider their lifestyles and budgets, a move to a market where their money goes a little further may be worth considering.
NerdWallet’s Q1 2020 First-Time Home Buyer Metro Affordability Report studied the median income of first-time buyers and the median list price of America’s 25 largest metro areas to determine each market’s affordability ratio with regard to FTHBs. The nationwide affordability ratio was 4.5 in the first quarter of 2020, meaning the average home in America cost 4.5 times the income of the average first-time buyer.
According to Elizabeth Renter, NerdWallet data analyst and author of the report, first-time buyers should ideally be aiming for homes priced at three times their annual income if they want to ensure a comfortable long-term home purchase. But because of supply constraints and high prices across much of the country, she says finding homes in that price range is “not realistic” for most first-time buyers.
“Big picture, we found that first-time home buyers are probably experiencing sticker shock,” Renter says. “In some of these metros, homes were listed at six, seven, even twelve times the first-time home buyer income. So, in some cases, it probably seems like ownership is completely out of reach, depending on where these people live.”
But Renter’s research found five American metros with an affordability ratio of 3.5 or less: Pittsburgh, Cleveland, Chicago, St. Louis and Detroit. All five cities have seen their populations either shrink or flatten over the past decade, which has contributed to limited price growth, although Pittsburgh had its affordability ratio improved by the strength of the city’s median income.
NerdWallet’s home and mortgage expert, Holden Lewis, says it’s unlikely that affordability alone will attract first-time buyers to any of the five cities. But that doesn’t mean it won’t play a role.
“I don't expect people to move to Midwestern cities just because homes are more affordable,” he says, “but affordability is a factor when making trade-offs. If you're weighing whether to accept a job offer in Chicago or one in New York City, the decision might come down to the affordability of homes in Chicago.”
Some first-time buyers may feel as if they’re faced with a rather unpleasant choice: Wait for a price correction that isn’t likely to materialize or move to Detroit. That’s not the kind of decision most millennials are likely to make. (Don’t let it get you down, Motown. MPA still loves you.) Fortunately, Lewis says there are still options out there for first-timers. They may have to stretch their budgets a little, but the relatively rapid appreciation will be worth it.
“Most places aren't due for a correction in home prices. Instead of waiting for prices to drop, they should consider moving to fast-growing big cities that are relatively affordable,” he says, listing Austin, Dallas, Oklahoma City, and Tampa as alternatives.
