A $1 million starter home is the new normal in over 200 cities

A new report published by Zillow shows that the typical starter home in 237 cities nationwide costs $1 million as the housing affordability crisis deepens.

A starter home used to be considered a smaller, but more affordable option for young families and other first-time buyers looking to enter the real estate market.

That may no longer be the case.

These days, the typical starter home is worth at least $1 million in 237 cities, the most ever, according to new findings published by Zillow. Five years ago, just 84 cities met that criteria. Zillow defines a starter home as being among those in the lowest third of home values in a given region.

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Nationwide, a starter home is worth about $196,611, which is "comfortably affordable" for a median-income household. But starter home values have surged 54.1% over the past five years, faster than the 49.1% increase seen for the average U.S. home during that same time frame. 

Half of all U.S. states have at least one city where the typical starter home costs at least $1 million. But more than half of those cities are located in California, where starter homes would cost buyers $1 million in 117 cities. New York came in second, with 31 cities, followed by New Jersey with 21. Florida and Massachusetts rounded out the top five, with 11 cities each.

There are a number of driving forces behind the affordability crisis. 

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Years of underbuilding fueled a shortage of homes in the country, a problem that was later exacerbated by the rapid rise in mortgage rates and expensive construction materials.

Higher mortgage rates over the past three years have also created a "golden handcuff" effect in the housing market. Sellers who locked in a record-low mortgage rate of 3% or less during the pandemic began have been reluctant to sell, limiting supply further and leaving few options for eager would-be buyers.

Economists predict that mortgage rates will remain elevated for most of 2024 and that they will only begin to fall once the Federal Reserve starts cutting rates. Even then, rates are unlikely to return to the lows seen during the pandemic, with investors predicting just one or two rate reductions this year.

Mortgage buyer Freddie Mac said Thursday that the average rate on a 30-year loan this week inched higher to 6.78%. While that is down from a peak of 7.79% last fall, it remains sharply higher than the pandemic-era lows of just 3%.

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Most homeowners say they are nearly twice as willing to sell their home if their mortgage rate is 5% or higher, according to a Zillow survey. Currently, about 80% of mortgage holders have a rate below 5%.