For First-Time Buyers, Data Determine Best, Worst Markets
How does a first-time home buyer know where to find the right home? Data, of course.
A new study from the AEI Center on Housing Markets and Finance ranks the affordability of 50 metropolitan regions in the U.S. for first-time homebuyers by using the ratio of home prices to incomes. AEI calculated the median home-price-to-income ratio by using government-guaranteed loan transactions to obtain actual 2017 home prices and the income of borrowers.
Not surprisingly, the study found established, inland markets such as Pittsburgh to be most affordable, while rapidly growing coastal markets such as San Jose to be the least.
Across the 50 metro areas, the ratio was 3.3. This ratio indicates that median first-time homebuyers bought a house worth 3.3 times their household income. The 10 most affordable cities for first-time homebuyers had an average ratio of 2.6, while the 10 most expensive ones had an average ratio of 4.3.
When it comes to being able to easily buy your first home, it’s not how much you make, but where you buy,” said AEI scholar Edward Pinto and Senior Research Analyst Tobias Peter, the study’s authors. “It is much easier to become a first-time buyer in some parts of the nation than in others.”
Key findings:
–Both house prices and incomes are higher in the 10 least affordable metropolitan areas compared to the 10 most affordable ones. Incomes were 51 percent higher in the 10 least affordable than in the 10 most affordable ($92,000 versus $61,000). But higher home prices more than canceled out this extra income. The median price of a home in the 10 least affordable metro areas was 2.5 times more expensive than in the 10 most affordable areas ($409,000 versus $159,000).
–While first-time homebuyers in both Houston and Portland had similar median incomes, buyers in Portland paid 52 percent more than in Houston. On a price-per-square-foot basis, median first-time homebuyers in Portland paid twice as much as the median ones in Houston ($207 per square foot versus $100 per square foot).
–Homes for a first-time buyer are similar in size across the country. A more expensive house doesn’t mean a bigger house, the study noted. The median finished square footage of homes for first-time buyers was similar for the 10 least affordable areas and the 10 most affordable ones (1,363 square feet versus 1,428 square feet).
–Affordability has remained relatively constant in the most affordable metropolitan areas, but it has worsened in the least affordable ones. In the 10 most affordable metro areas, the first-time homebuyer affordability ratio increased from 2.5 in 2013 to 2.6 in 2017. This is the result of a modest increase in the median price of purchased homes (+7 percent over five years) combined with a lower increase in median income (+4 percent over five years).
–In the 10 least affordable metro areas, the first-time homebuyer affordability ratio had a larger increase (from 4.0 in 2013 to 4.3 in 2017). The ratio would have increased even more had it not been largely offset by an increase in median incomes (16 percent over five years) to counteract the substantial increase in the median price of purchased homes (24 percent over five years).
–First-time homebuyers in Denver lost the most ground, as their affordability ratio increased from 3.5 in 2013 to 4.1 in 2017, in part because Denver has had strong home price gains (48 percent over five years), which greatly outstripped the increase in income (20 percent over five years).
