FNC: Starter Home Prices Accelerating

FNC Inc., Oxford, Miss., said low housing inventories are beginning to hit the starter home market harder, with home prices accelerating and bidding wars erupting.

FNC Housing Economist and Director of Research Yanling Mayer said in March, first-time home buyers paid on average $137,000 for a starter home (defined as having a sale price in the bottom 30th price distribution), up by 6.0 percent from a year ago. During the same period, the median price rose at a slower rate of 4.3 percent year-over-year to $220,000 (1.7 percent).

“The ongoing housing crunch appears unevenly felt by first-time homebuyers due to even lower inventory of entry-level homes,” Mayer said. “There are signs that the supply shortage and resulting price bidding are driving prices of entry-level homes to rise much faster than the median property on the market.”

In the last 18 months, Mayer dais, starter homes appreciated by 1.5-2.0 percent faster than the median home sold in the market.

FNC estimated the average home price in April reached $231,000, up 7.4% from the same period a year ago. At the current pace of the recovery, this spring and summer will soon mark the first time that home prices will rise above the 2006-2007 peak levels.

However, FNC noted the rate of price appreciation has notably tapered off from its double-digit days of 2012 and 2013. After dropping to its lows at the end of 2014, the year-over-year growth has since held up at an arguably more sustainable rate of 5 to 6 percent.

“This spring appears no different from 2013, 2014 and 2015, in that the limited supply of homes for sales continue to constrain would-be buyers in their ability to finding a suitable home to purchase,” Mayer said.

Mayer added the impact of the ongoing housing crunch will likely play out differently across the country. In markets on the West Coast where the recovery has been strong and job growth robust, first-time buyers are likely to feel the greatest pinch in affordability. On the other end of the spectrum, the housing crunch in many Midwest markets–with their recovery at best described as anemic–might not have much bearing on first-time buyers.

“The winners at large [are] on the other side of the housing crunch–existing homeowners looking to sell their current home,” Mayer said. “Rising home prices evidently mean–to the remaining 70 percent repeat and move-up homebuyers–rising affordability as their homeowner’s equity grows. With more equity to be extracted, it also means affordability of larger down payment towards the next house. And escalating bidding wars will only help them sell and secure the next house faster, much faster.”