First-Time Home Buyer Affordability Report — Q3 2023

High mortgage rates sidelined home buyers and sellers alike in the third quarter, making the already lofty financial goal of homeownership potentially unattainable for would-be first-timers.

Homes were typically listed at 5.8 times the median potential first-time home buyer income in the third quarter, according to NerdWallet’s 15th quarterly analysis of home affordability across the nation. This marks no change from the previous quarter, highlighting an ongoing affordability struggle. In a perfect world, would-be buyers shop for homes listed around three times their income.

Just one metro out of the 50 most populous in the U.S. meets that threshold: Homes in Pittsburgh were listed at three times first-time buyer income in the third quarter. At the other end of the spectrum, buyers earning the median first-timer income in Los Angeles are opening real estate apps to see homes listed at 13.4 times what they earn.

This table details the affordability metrics for the biggest 50 metros in the nation.

Mortgage rates erase slight price declines

Across the nation, median list prices fell slightly (2%) in the third quarter. Unfortunately, only cash buyers are likely to reap any benefits from this drop — the modest decrease is easily gobbled up by higher mortgage rates. A typically priced home would cost around $250 more per month and nearly $90,000 more over the life of the loan in 2023 compared to one year ago. Those calculations don’t include other expenses, such as insurance and taxes, which are often added to your monthly payment.

Buyers felt the biggest pricing relief in San Francisco, where list prices fell 8% from the previous quarter. While this single-digit drop seems small, home prices in the Bay Area are high. That 8% translates to nearly $100,000 less on the sticker price — prices fell from roughly $1.2 million to $1.1 million.

First-time buyer guidance: First-time home buyers should think about the housing market as a collection of markets. What’s happening in one city – or even in one neighborhood – isn’t necessarily happening in another. So don’t get distracted (or discouraged) by numbers on the national news. If you know you want to buy but need prices to come down or a specific home type to hit the market, talk to an agent in the area you’re considering. They’ll have boots-on-the-ground intel and can keep an eye out for you.

Lack of homes for sale is sustaining the affordability problem

As of September, the annual rate of existing home sales was just under 4 million, according to data from the National Association of Realtors. Barring a few blips, that rate has been falling since February 2022, when it was 5.9 million. Rising interest rates have made already pricey homes unaffordable, and buyers were backing down in the third quarter. One might think this falling rate of sales would result in lower prices — if homes are priced at a point where sales are stalling, sellers would adjust downward to attract buyers. But in the current housing market, nothing is quite so simple and everything is impacted by the stark lack of inventory.

There were 15% more listings on the market in the third quarter compared to the second. But this improvement still marks a 6% decrease from a year ago, and it’s 45% fewer listings than the third quarter of 2019. In other words, a slight quarter-over-quarter improvement is a drop in the bucket.

This lack of supply is holding prices aloft in most markets, even as demand dwindles. Three metros — Portland, Oregon; Indianapolis and Denver — experienced a 32% increase in listings in the third quarter, but all three are still considerably short of where they were in 2019, before the pandemic. Because of this, even as demand falls, prices are unlikely to respond in a significant way.

First-time buyer guidance: If you’re waiting for lower rates to shop for a home, remember: so is everyone else. When rates come down, we can expect demand to skyrocket, and it will do so amid an ongoing shortage of homes. It’s likely these conditions will push prices up further. There are trade-offs in buying now versus waiting for “better” conditions later.

Housing economists’ best guess is that mortgage rates could come down by a percentage point or so by the end of 2024, but there are no guarantees. If you’re ready to buy and the right home (or something close to it) crosses your path now, it might be wise to pounce. The likelihood that rates will fall within the next few years is good, but the likelihood that such a rate decrease would result in enough newly listed homes to bring prices and demand down meaningfully is slim. On the other hand, if you buy now and maintain your creditworthiness, you may be able to refinance your mortgage should rates decrease.