First Time Homebuyers Face Another Barrier in Q4

The glaring lack of affordability held steady for first-time homebuyers in the final quarter of 2021. After a slight increase in listings in the third quarter, the number of homes on the market plunged further into the hole to close the year.

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In our last quarter first buyer analysis for Q3, we warned buyers not to be overly optimistic in the face of minor improvements. With fourth-quarter selling prices up 14% nationwide over the past few years even after adjusting for inflation, and supplies running out, the interlude of price stability with small listing increases cannot change the dynamics of this seller’s market.

In general, any increase in inventory in the third quarter (up 31% across the most populous metropolitan area) was buffered as listings fell 14% in the fourth quarter. For buyers, the additional price increases aren’t enough to make homes affordable, and still-dropping supplies will only complicate matters.

Affordability across the nation’s largest metro

Average affordability remained stable from the third to fourth quarter of 2021 in the 50 largest metropolitan areas in the country. Homes are listed at 5.5 times the average first-time homebuyer’s income in this metro area, and 5.3 times across the country as a whole.

As a reminder, homebuyers have historically been advised to look at listed homes with roughly triple the income. For first-time buyers, staying within a budget is very important, as they tend to have no wiggle room in their monthly expenses. But as this analysis over the past few years has shown, the adage “three times your income” is probably as outdated as dial-up internet.

The most affordable metros for first-time shoppers remain in the Rust Belt and Midwest. Detroit joined the ranks, eliminating Minneapolis and Baltimore. First-time buyers in the fourth quarter will see their money go the furthest in Pittsburgh, where homes are listed at 2.9 times the average first-time buyer income, Cleveland (3.1), St. Louis (3.3), Buffalo, New York (3.5), and Detroit (3.5).

For the first time since early 2020, the most affordable metros include one outside of California, as Miami has a similar affordability ratio to Riverside. Los Angeles, constantly at the bottom of the affordability list, found homes priced at 11.2 times first-time buyers’ earnings, compared with 12.1 last quarter. Others at the end of this list include San Diego (9.2), San Jose (8.3), Sacramento (7.7), Riverside and Miami, both 7.6.

First time buyer’s guide: More important than following general guidelines is understanding your personal financial picture and how much of a home is realistic, given your budget and the location where you shop. Homebuyers should spend sufficient time before they start shopping to establish a budget for their home purchase. This step doesn’t mean calculating only the purchase price of your home, but also how much you’ll be paying on mortgage interest — interest rates are already up by 2022 — homeowners insurance, taxes, and home care and maintenance, not to mention other financial obligations like debt. A home affordability calculator can help with this process.

After a minor bump, inventories drop again in Q4

The number of monthly active listings in the country’s largest metro market is down 14% from the last quarter. This drop came after a bit of relief, as listings rose 31% from Q2 to Q3. But relief is simple, at best, and — as we see it now — temporary. Nationally, listings are down 9% from the last quarter. The chart below shows how deep we are in the housing shortage. It will take many quarters of sizable growth to return inventory to pre-pandemic levels.

Some of the least affordable markets experienced the biggest declines in average monthly inventories. Sellers in these locations may worry about listings, knowing that they will find themselves on the side of the buyer in an expensive and unprofitable marketplace. In San Diego, the monthly listing average fell 48% in the fourth quarter, along with 39% in San Jose and 37% in Los Angeles. Overall, the eight metros saw inventories fall by 20% or more quarter-over-quarter.

Nationally, listings are down 25% compared to the fourth quarter of 2020. And the year-over-year decline is even more dramatic in some metros. In Hartford, Connecticut, active listings are down 60% year over year; in Miami, they are down 51%; and in Raleigh, North Carolina, the number of homes on the market fell by half.

First time buyer’s guide: Shopping for homes when there are very few available makes the buying process more complicated. It’s not just your budget that you need to worry about; Your wish list and desired location may have equal weight. If you can be flexible about these things, you are better suited to buying in today’s market, where listings are few.

However, if you are fully committed to a particular type of home in a particular neighborhood, you may have better luck waiting for it to come to market than chasing a home that won’t please you. In this case, tell the agent exactly what you’re looking for so they can let you know if they see a list that ticks your box. This approach eliminates the inevitable disappointment, as you’re less likely to waste time going to shows and open houses that don’t fit the bill. But that means it will take you longer to become a homeowner.

Average prices are relatively stable, but some metros stand out

As in the third quarter, prices among the country’s largest metro areas fell 1% quarter-on-quarter and averaged 2% year-over-year. The seemingly endless rise has slowed, but this modest decline is too small to mean that the price is falling. And in the average there are some quite significant changes.

From the previous quarter, the biggest price drop occurred in Detroit, where prices fell 13%. The biggest boost was seen in the New York City metro area, where prices rose 8% during the quarter.

Usually, the fourth quarter marks a slowdown in the housing market, as the cold weather and holiday season catch everyone’s attention. During this time, prices generally start to creep down to their lowest point in January and February. But today’s housing market is anything but typical, and seasonal patterns are not as dramatic or predictable as they once were.

First time buyer’s guide: Prices are not expected to rise as much in 2022 as they have over the past two years. However, if the typical seasonal trend persists even a little, it will intensify this spring as the weather warms up. As a hopeful buyer, you shouldn’t be too optimistic when you see prices flattening out in the fourth and possibly first quarter. Instead, it is best to prepare for sustained high prices in most major markets across the country. That said, there are areas where your home purchase dollar goes further, and prices haven’t grown that much. Less populous cities and rural areas are often insulated from the most price hikes, so if you have the flexibility to find a home in a less crowded market, you may have better luck staying within a budget.

Pittsburgh: The only ‘affordable’ metro

If finding a home to triple your income is a threshold to meet, the Pittsburgh metro area holds the most promise for first-time buyers. It was the only metro analyzed where home prices were less than triple the earnings of the city’s first-time buyers in the fourth quarter. This is only the second time a metro has fallen below this threshold in the history of this analysis — dating back to the first quarter of 2020, before the pandemic hit. And then, Pittsburgh too.

In the fourth quarter, homes registered 2.9 times the earnings of first-time buyers in Steel City, averaging about $219,000. There were approximately 3,800 homes on the market in any given month of the quarter, and while this is a 33% decline since the first quarter of 2020, the decline was much more modest than in other metro areas.

The article First Time Home Buyers Faced Another Barrier in Q4 originally appeared on NerdWallet.