Photo by Tessa Wilson on Unsplash

In a somewhat cruel twist of fate, buyers who have taken advantage of record-low mortgage rates are being met with rising home prices and dwindling inventory levels. A new Redfin analysis suggests that prices of “affordable” homes, or those in the 6th-35th percentile for value, increased 5.5 percent year-over-year between March 15th and May 31st. 

Comparatively, homes in the “expensive” tier, which fall in the 66th-95th percentile for value, rose by only 2 percent. Nationwide, the median price of an affordable home is $164,460 and $436,123 for an expensive home. Listings in the very top and bottom 5 percent of the market were not included in the report.

Heightened competition among buyers at the lower end of the market can be attributed to the shortage of starter homes. Earlier this year, Realtor.com predicted that Millennials would purchase more homes than any other generational cohort in 2020. As many of them are first-time buyers with lower downpayment sums, they’re forced to duke it out for a much smaller pool of affordable homes.

“Many Americans—especially millennials—were already toying with the idea of buying their first house before the pandemic,” said Redfin lead economist Taylor Marr. “Now they’re actually taking the plunge because mortgage rates are so low and it’s less attractive to live in a small apartment right next to the office.”

There was a weekly average of 322,000 homes for sale in the affordable tier during the 12 weeks ending May 31 — a 3 percent decline from levels recorded in February before COVID-19 was declared a pandemic. In the expensive tier, there were roughly 586,000 homes for sale on any given week throughout that period, a 5.25 percent increase compared to three months prior.

Across the country, Newark, New Jersey was the metro that recorded the steepest increase in affordable home prices, climbing 14.7 percent year-over-year to $211,281 during the 12-week stretch. Philadelphia and Detroit came in second and third, respectively, with prices surging 13.6 percent and 13.3 percent.

The only metros that saw affordable home prices decline were San Jose (-2.4 percent to $775,500) and San Francisco (-2.1 percent to $952,125), which can hardly be labeled as “affordable.”

Marr anticipates that home prices in the lower end of the market will continue to rise over the next few years if the supply situation doesn’t improve.

“Fortunately, mortgage payments are actually lower now than they were a year ago, despite the growth in home prices, because mortgage rates have dropped so much,” he added.

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