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Why are starter homes so expensive?

Home prices surged during the pandemic, when record-low mortgage rates, accommodative monetary policy and new remote working trends caused the demand for homes to spike.

At the same time, the supply of new housing dropped due to pandemic-related disruptions to supply chains and industry labor pools.

Now, mortgage rates have shot up and prices for entry-level homes keep rising because there are so few homes for sale — meaning there’s more competition for the ones that are on the market.

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‘A wild goose chase’

According to Redfin, new listings of starter homes for sale dropped 23% from a year earlier in June — the biggest drop since the start of the pandemic — and sales of starter homes dropped 17% in the same period.

Adding to the woes of the average prospective homebuyer, an increasing share of starter homes are going to cash buyers who have the advantage of avoiding those high mortgage rates. The most recent data shows that in May, more than one-third of U.S. starter homes were purchased in cash.

“Buyers searching for starter homes in today’s market are on a wild goose chase because in many parts of the country, there’s no such thing as a starter home anymore,” said Redfin senior economist Sheharyar Bokhari.

“The most affordable homes for sale are no longer affordable to people with lower budgets due to the combination of rising prices and rising rates.”

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About the Author

Bethan Moorcraft

Bethan Moorcraft

Reporter

Bethan Moorcraft is a reporter for Moneywise with experience in news editing and business reporting across international markets.

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