Two years into pandemic-era housing market, outlook for first-time buyers is grim

This report marks two years since NerdWallet began analyzing quarterly home affordability for first-time buyers. The first analysis was the last “normal” quarter before the COVID pandemic sent the country into lockdown — Q1 2020. Since then, prices have risen considerably — up 26% across the nation, after adjusting for inflation. But perhaps even more impactful, the number of listings on the market has plummeted further and further — down 62% nationwide over that two-year period.

The first quarter also saw mortgage rates rising faster and higher than had been forecast for 2022. As we move into the spring/summer homebuying season, rates are expected to continue to climb. This will temper some demand, which may allow price growth to slow. But we’re a long way from pre-pandemic inventory, and current buyers will still have a limited number of listings to choose from.

Affordability falls: Prices outpace income

Homes in the most populous metro areas were listed at six times the typical first-time buyer income in the first quarter, compared with 5.5 times their income in the previous quarter. This marks the first time in the history of this analysis that affordability has gotten so bleak. Across the nation, homes were listed at 5.9 times the median first-time buyer income.

The reasons for this drop in affordability are twofold: an increase in prices and a real decrease in wages — compensation hasn’t kept up with inflation.

For the first time, the least affordable metros weren’t only on the West Coast. Miami joined the least-affordable five, nudging out Riverside, California. Those metros where homes are furthest out of reach for first-time buyers include Los Angeles, where first-quarter list prices were 12 times first-time buyer income; San Diego, which reached double digits for the first time (10); San Jose (9.4); Sacramento (8.5); and Miami (8.5).

Also see: America’s national average gas price just hit $5 per gallon for the first time ever. Prepare for prices ‘to go even higher,’ GasBuddy says.

For the second quarter in a row, Pittsburgh was the most affordable metro area, and again the only one where homes met the threshold for affordability — three times first-time buyer income. Other affordable metros include: Cleveland (3.1), Detroit (3.5), Buffalo, New York (3.6); and Baltimore (3.7).

First-time buyer guidance: If you were unable to afford available homes in the first three months of 2022, don’t expect things to improve anytime soon. In the short term, any “relief” in affordability will be in the form of slowed price growth. But prices aren’t expected to actually decrease. Deciding that now isn’t the best time to buy may be a tough thing to concede, but if you have to shop at the upper end of your budget, given the area you want to live in and the type of home you want to own, postponing your purchase may be the best decision you can make. Use this time to amass a larger down payment. The more you can put down on a home, the more competitive your offer will be and the less you’ll pay in interest over the life of your mortgage.

Read: Prepare yourself: ‘The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006’

More grim news in home inventory

In the first quarter, we expect inventory to be at a low for the calendar year. In the coldest months, fewer people list their homes. But despite inventory seeming to bottom out over the past few years, Q1 proved it could go even lower.

Across the nation, inventory fell 29% from last quarter and 24% from last year at this time. In the largest metro areas, listings fell 33% and 22%, respectively.

Two-year inventory change shows pandemic-era impact

Comparing average active listings in the first quarter of 2020 with the start of 2022 illustrates just how depleted the market has become over the course of the pandemic. Nationally, during that two-year period, the number of active listings fell 62%. But in some metros, it has fallen much more. For example, in Raleigh, North Carolina, the number of active listings fell 82%, from 4,200 in the first quarter of 2020 to 750 in the first quarter of this year.

The table below shows inventory changes across all 50 metros analyzed.

Not every home on the market is a first-time buyer’s home. This is largely a matter of budget — first-timers generally have lower incomes than repeat buyers, and they don’t have the benefit of sales proceeds from selling their current home for a down payment on the next.

More: ‘All of this points to a broader weakness in the housing market’: Buyers are officially spooked by rising interest rates — just don’t expect a real-estate crash

This means first-time buyers feel the sting of this desolate landscape even more than other buyers — they have even fewer listings to choose from.

First-time buyer guidance: Competition is fierce for all buyers, but particularly those shopping for a home for the first time. A knowledgeable local real estate agent can be your champion when going head-to-head with multiple other home shoppers. But you want the right person on your side. Talk to several agents before choosing one to hire. Ask about their experience in your area, whether you’ll be working with them or a team and how long you can expect to wait for a response when you have questions. Finally, ask for references — firsthand accounts from prior clients can be telling.

Prices up even when they’re generally lowest

As with inventory, prices are generally at their lowest in the coldest months. But prices rose 4% across the nation’s largest metro areas compared with last quarter. And that’s after adjusting for remarkably high inflation. Oklahoma City and Kansas City saw the biggest quarter-over-quarter price increases — up 18% and 15%, respectively. Quarter-over-quarter gains were seen in all but eight of the metro areas analyzed.

The table below shows price changes across all 50 metros analyzed.

Most dramatic impact: Austin, Las Vegas and Tampa

Climbing prices and sinking inventory have been the two hallmarks of this pandemic-market upset, and these two factors have been most dramatic in three metro areas: Austin, Texas; Las Vegas; and Tampa, Florida. More than any other metro residents, buyers in these three markets have experienced the greatest changes over the past two years.

From the first quarter of 2020 to the first quarter of 2022:

• Austin: Monthly average inventory has fallen 71% — from 5,700 to 1,600 — while prices have climbed 44% after adjusting for inflation. Homes here are currently priced at 7 times first-time buyer income.

• Las Vegas: Monthly average inventory has fallen 51% — from 7,500 to 3,700 — while prices have climbed 31% after adjusting for inflation. Homes here are currently priced at 7.9 times first-time buyer income.

• Tampa: Monthly average inventory has fallen 75% — from 12,700 to 3,200 — while prices have climbed 28% after adjusting for inflation. Homes here are currently priced at 6.4 times first-time buyer income.

First-time buyer guidance: Buying in a competitive location makes current difficulties even more of a struggle. If you can be flexible about location, do. Look outside areas you’ve previously set your sights on. If you are limited by a commute, consider alternative home types such as condos or townhomes instead of single-family homes. The more flexibility you have, the more likely you are to win out over other buyers.

Read next: Renters, beware. These cities are facing some of the highest rent increases in America: ‘I think you’ll see more renters take on roommates’

Analysis methodology and additional data available in the original article, published at NerdWallet.

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Elizabeth Renter writes for NerdWallet. Email: [email protected]. Twitter: @elizabethrenter.