First-Time Home Buyer Affordability Report — Q4 2023

In the last quarter of 2023, home sales were few and far between as high prices, high rates, low inventory and seasonal factors all combined to make the housing market a bit of a ghost town. Would-be first-time buyers no doubt felt the desolation.

Homes were listed at nearly five times the potential first-time buyer income in the fourth quarter, on average across the country. Prices fell slightly from the previous quarter, as is common in the final months of the year. Bucking seasonal trends, inventory rose 9% from the third to the fourth quarter, reaching a level not seen since late 2020. But mortgage rates peaked in late October, hitting about 7.8% for the 30-year fixed, an over-two-decade high, before trending downward through the holidays.

First-time buyers have to contend with unique challenges no matter the market. They are generally earlier in life and career than repeat buyers, and they lack the wealth associated with equity that existing homeowners can draw upon.

In 2024, rates have already begun to come down and are expected to reach 6% by the end of the year. While this will provide some relief in the costs of ownership, the year is unlikely to bring much in the way of lower prices or meaningfully higher inventory.

Seasonably slightly lower prices in fourth quarter

Home prices typically come down slightly as the weather cools, and inflation-adjusted list prices were 4% lower across the nation in the fourth quarter. List prices matter because they likely play a significant role in would-be home buyers' decisions to get serious about home shopping.

Comparing list prices versus the median income of people in the typical first-time buyer age range provides a good gauge of affordability. And while homes were listed at 4.9 times this income across the nation, the largest metros demonstrated that buyers shouldn’t necessarily base their decisions on national numbers.

One of the most affordable metro areas, Pittsburgh, had homes listed at 2.9 times first-time buyer income. It's the only metro area where the metric came in below an old rule of thumb — that homes listed at three times your income are likely to be affordable. Other affordable metros include Cleveland and Detroit, where homes were listed at 3.3 times first-time buyer income; and St. Louis and Buffalo, New York (3.5).

At the other end of the spectrum, homes in Los Angeles were listed at 12.8 times would-be first-time buyer income. Other costly metros include San Diego (10), Miami (8.4), San Jose, California (8.1), and New York City (7.6).

First-time buyer guidance: Prices are unlikely to come down meaningfully in the coming months; they generally rise as we move into the second quarter. Steady yourself for the reality of the high prices you’ll face in the market where you hope to buy. A local real estate agent can provide intel beyond the list prices you see in real estate apps on your phone. They can tell you whether homes in your area are selling for over list price and how many offers they’re getting, on average.

Mortgage rates peaked

Affordability depends on more than list prices, and rates impacted even the most affordable markets. With interest on a 30-year fixed mortgage averaging 7.3% in the fourth quarter, the monthly principal and interest payment on a median-priced home would be about $2,290, assuming a 20% down payment. By contrast, if rates were a percentage point or so lower — where projections show them going by the end of 2024 — that monthly payment would be nearly $300 less.

The costlier the home, the more these higher rates matter. For example, payments on a median-priced home in Cleveland would be nearly $160 less at 6% than 7.3%, while payments in San Jose, where typical home prices exceed $1 million, would be about $920 lower under that more favorable interest rate.

First-time buyer guidance: Rates are projected to decrease modestly throughout 2024. To qualify for the lowest rates, you’ll want to keep your credit in tiptop shape. This should be a long-term goal as well — if rates decrease after you’ve purchased, having solid credit can help your chances of refinancing your mortgage to take advantage of those lower interest costs.

Fourth-quarter inventory continued (slowly) recovering

The number of homes available for sale has been paltry for several years now, falling to fewer than 400,000 across the country in 2022, compared with more than a million in late 2019. And while listings are generally at a low point in the fourth and first quarters of the year, there were more homes on the market in the last quarter of 2023 than in Q3. In fact, inventory rose 9%, to a level not seen since late 2020.

Across the most populous metros, inventory rose nearly across the board, spiking highest in Tampa, Florida (+34%), Phoenix (+30%), Louisville, Kentucky, and Miami (both +25%).

First-time buyer guidance: Though inventory is beginning to rise and we’ll likely see more homes hit the market as the weather warms and rates continue to fall, there is still a serious shortage. This means competition will be fierce for the listings that are available. Go into the housing market with a game plan — a detailed shopping list, of sorts. You’ll likely have to sacrifice some of the items on your wish list, but knowing which you’re willing to compromise on beforehand can make those compromises less hand-wringy.