With affordability low, starter homes see the largest price gains

2.7% overall average price gain in 30 big US markets

“Survey says” examines various rankings and scorecards for geographical locations, noting that these grades are best viewed as a combination of artful interpretation and data.

Buzz: The housing market appears to be benefiting from strong interest in low-cost housing.

Source: My trusty spreadsheet examined First American’s home-price indexes for 30 of the country’s largest housing markets, with an unusual twist. These yardsticks divide markets into thirds based on single-family home price points within each metro area: the cheapest (starter homes), the middle (mid-tier), and the most expensive (luxury).

Summary

For the 12 months ending in August, the overall price changes in these 30 markets averaged a 2.7% gain, not bad for a turbulent period for house hunting.

Detroit (up 6.9%), St. Louis (6.6%), Orange County (6.5%), Baltimore (5.8%), Boston (5.7%), and Miami (5.5%) led the way in the last year.

Meanwhile, overall pricing fell in three markets: Austin (-5.1%), Phoenix (-2%), and Las Vegas (-1.9%). During the pandemic, this collection of cities experienced rapid growth.

Among the larger gains in California’s six markets tracked by First American was a coastal theme. San Diego (up 5.3%) and Los Angeles County (4.2%) followed Orange County. Inland, gains were lower in Sacramento (2.7%), the Inland Empire (1.2%), and Oakland (0.7%).

Specifics

It’s been a crazy year. Rising mortgage rates initially froze the market, but house hunters adjusted and drove up prices on the few available homes.

During that whirlwind, a small gap in average appreciation by price slice emerged.

In a year, starter home prices increased by 4.1%. Detroit led the way with a 10.3% increase, followed by New York-New Jersey (10.1%), Baltimore (9.7%), and St. Louis (9.6%).

Soaring mortgage rates have made homes unaffordable for the majority of homebuyers, putting a premium on more affordable homes and contributing to price increases in the lower tier of the market.

It’s worth noting that four markets saw starter-price drops, led by Austin’s 6.1% drop.

Luxury home prices increased by 3.3%. Atlanta ranked first, with a 10.3% increase.

Top-tier housing frequently follows its own economic beat. This is because people with a lot of money, the types who buy more expensive homes, are often less affected by broader economic trends that hurt average Americans’ wallets.

Nonetheless, four markets saw a drop in luxury prices, led by Austin’s 2.1% drop.

Mid-tier home prices increased by 2.2%. Orange County had the highest gain of 7.6%.

Why is the price appreciation in most metros so low? In comparison to the bargain basement of real estate, this has less appeal. There is also no high-end sizzle.

In addition, eight markets experienced depreciation in the market’s middle, led by Austin’s 5.9% drop. Yes, once-proud Austin had the worst results – last in overall pricing and in all three price segments.

The bottom line

The broad but minor price increases are certainly surprising given that it costs 22% more to finance the same loan amount during this time period. Remember that 30-year fixed mortgage rates increased from 5.2% to 7.1% in a year.

However, the relative weakness in the market’s pricing center is perplexing, to say the least.

Perhaps this segment of the market is made up of long-term homeowners content to stay put with a 3.5% mortgage to pay off?

Is this the type of housing that has lost favor with investors?

The middle may be where the must-sell activity is concentrated – deaths, divorces, debt problems, and so on.

Or consider this bleak possibility: could the murky middle be a warning sign for the housing market?