A combination of rising mortgage rates and a shortage of newly built single-family homes has made homeownership more unattainable for the majority of renters in major U.S. metro markets, according to an analysis by Point2Homes. After the latest mortgage rate increase, Point2Homes estimates renters in 46 of the 50 largest U.S. cities can no longer afford a starter home.
To estimate attainability of homeownership for renters, Point2Homes analyzed data on the median price of a starter home and renter households’ median income in 50 U.S. cities. The study also applied ideal conditions for renters, assuming a 20% down payment was already covered for potential homeowners.
In San Francisco, the average renter household makes $100,715, but the amount a first-time buyer would need to comfortably cover mortgage payments was $251,190. Under these conditions, renters in San Francisco are 60% short of attaining homeownership. Renters in three other U.S. cities analyzed (San Jose, Los Angeles, and New York) were more than $100,000 short of the amount they would need to cover their mortgage on a starter home. The average renter household in Los Angeles is making 70% less than the amount needed to comfortably cover a monthly mortgage in the metro, according to Point2Homes. In October, renters in 15 cities earned less than 50% of what was needed to afford a starter home, up from 11 cities as recently as August.
Renters in four cities (Detroit; Tulsa, Oklahoma; Memphis, Tennessee; and Oklahoma City) earned 100% of more than what was needed to afford an entry-level home, according to Point2Homes. Kansas City, Missouri, and Baltimore, two cities affordable for renters as recently as August when interest rates hovered around 5.5%, have become unaffordable using Point2Homes’ criteria. The price of starter homes were $200,000 or less in just 15 of the 50 U.S. cities analyzed by Point2Homes in October.
To conduct the study, Point2Homes analyzed renter household incomes in the 50 largest U.S. cities and median starter price homes—homes that fell within the 5th to 35th percentile range of a given region. To calculate the income required to afford the monthly mortgage payments on a median-priced starter home. Point2Homes considered that the monthly mortgage should not represent more than 30% of a renter household income, assuming a 20% down payment was already covered and a loan was made based on a 7%, 30-year fixed-rate mortgage.
