The typical renter can only afford to buy a home in Pittsburgh and three other cities
First-time homebuyers are often renters who have saved for a down payment and built a good credit score, allowing them to secure financing for a home. But for most renters across the U.S., taking the next step into homeownership is increasingly out of reach.
There are only four major U.S. cities where the typical renter is financially capable of buying 50% or more of the homes for sale, which is the definition of an affordable market, according to a new analysis from real-estate services company First American Financial Corp., which analyzed incomes and home prices across the nation.
These affordable locations have something in common: They are all Rust Belt cities, where home prices are typically lower than in big coastal cities like Los Angeles and New York. In other words, if you're a renter and want to buy a home, you're going to find the most choice in Pittsburgh, along with Buffalo, Cleveland and Detroit, according to the analysis.
By comparison, only 1% of homes in Los Angeles are affordable for the renter earning the median income of that city, the analysis found. And some cities that used to be affordable, such as Salt Lake City, have jumped into the ranks of the unaffordable due to the run-up in home prices during the pandemic.
Across the nation, there has been a sharp drop in affordability for first-time homebuyers during the past year, largely due to surging mortgage rates. A year ago, about 45% of homes were affordable for renters, but that's declined to 34% today, the analysis found.
That matters because homeownership is considered one of the best shots for building wealth — and failing to get a foothold in the housing market may hurt a family's chance of securing their financial future.
"Generally speaking, homeownership is a primary vehicle for wealth creation, so if you think about renters transitioning into homeowners, it's important to think about where it's more attainable," noted Odeta Kushi, deputy chief economist for First American Financial Corp.
She added, "In Los Angeles's case, the median renter can only afford 1% of homes for sale — and it may not even be a livable home."
The culprits
There are two reasons for the decline in affordability: Higher mortgage rates and home prices.
The average rate on a typical 30-year mortgage reached 6.91% this week, up from 6.69% a week ago and the highest level since November, the Mortgage Bankers Association (MBA) said Wednesday.
That means that purchasing a home is much more costly than it was a year earlier, when rates were about two percentage points lower. And home prices, which had eased slightly, are once again rising, adding to price pressures for new buyers.
"Don't get discouraged if you can't buy today," Kushi advised. "It can allow you to save for a down payment, and maybe more inventory can hit the market."
She also advises renters to shop around for a mortgage. "A lot of first-time buyers don't realize you can get quoted a lot of different rates from a lender," she noted. Shopping around can pay off, she added.