Starter Homes Are Out of Reach for Most First-Time Buyers—Except in These Affordable States

It's becoming more and more difficult for aspiring homeowners to break free from renting, but there are still a few states where buying a starter home isn't out of reach, a new report from LendingTree has found.

A handful of Southern states offer the best opportunity for renters to make the leap to homeownership, including Mississippi, West Virginia, Arkansas, and Alabama, the study found.

A starter home is defined as being a smaller, affordable home—usually around 1,500 square feet or less. In recent years, it's become increasingly difficult to find starter homes, and prices have risen sharply.

In 2019, the median listing price for a two-bedroom home was around $220,000—which would have required a household income of roughly $49,000 to afford. By 2022, the median listing price for the same property was $325,000, a 48% increase in price.

For its starter home affordability report, LendingTree analyzed the average starter home cost in every state and ran it against the average nonhomeowner salary. In nearly every state, the median cost of homes far outpaced the median salary of a nonhomeowner.

Nationally, just 37.6% of renters can afford a starter home, with the average price for starter homes sitting at $200,000.

The median nonhomeowner household earns $7,099 less than the $62,099 annual income needed to afford a home at that price, the study found.

Rhode Island has most significant starter home affordability gap, according to the report. The median cost of a starter home in the state is $350,000.

That's affordable, compared to the state's overall median home price of $575,000. But when you compare it against the median income of nonhomeowners in the state, which is $51,000, it's still very much out of reach.

To afford a home at that price, you'd need to make around $107,000 a year, which means there's a 110% affordability gap in the state.

California, Hawaii, Colorado, and Massachusetts all have median starter home prices of $400,000 and above, and affordability gaps of more than 80%.

So where is the dream of a starter home still alive? The report found that the South dominates when it comes to the starter home market.  

Mississippi leads the nation, with 62% of renters in the Magnolia State earning enough to afford the median starter home there, the study found.

Matt Schulz, LendingTree chief consumer finance analyst and the author of “Ask Questions, Save Money, Make More: How to Take Control of Your Financial Life," says there are often ways to make homeownership a reality. But "it may take planning, sacrifice, and a clear-eyed look at what you’re willing to do to make your dream come true."

How to make homeownership a reality

Would-be homeowners hoping for the best mortgage rates should focus on the following:

• Improving your credit score: Working on your credit score can help lower your mortgage rate and monthly mortgage payments.
• Paying down existing debt: Reducing credit card balances and other high-interest debt helps improve your debt-to-income ratio, a critical metric for mortgage lenders.
• Growing your savings and planning for closing costs: Beyond the down payment, ensure you have funds for closing costs, moving expenses, and the inevitable maintenance that comes with homeownership.

Above all, says Schulz, prospective homeowners need to be honest about how much house they can afford.

Where starter homes are still affordable

Mississippi

Percentage of nonhomeowners able to afford a starter home: 61.8%
Starter home value: $85,000
Starter home price-to-income ratio: 2.19
Income needed: $29,523
Median nonhomeowner income: $38,800

West Virginia

Percentage of nonhomeowners able to afford a starter home: 58.0%
Starter home value: $90,000
Starter home price-to-income ratio: 2.57
Income needed: $29,114
Median nonhomeowner income: $35,000

Arkansas

Percentage of nonhomeowners able to afford a starter home: 54.3%
Starter home value: $110,000
Starter home price-to-income ratio: 2.75
Income needed: $37,862
Median nonhomeowner income: $40,000

Alabama

Percentage of nonhomeowners able to afford a starter home: 54.1%
Starter home value: $120,000
Starter home price-to-income ratio: 2.82
Income needed: $39,239
Median nonhomeowner income: $42,500

North Dakota

Percentage of nonhomeowners able to afford a starter home: 52.7%
Starter home value: $150,000
Starter home price-to-income ratio: 2.95
Income needed: $48,785
Median nonhomeowner income: $50,800

Kansas

Percentage of nonhomeowners able to afford a starter home: 52.3%
Starter home value: $125,000
Starter home price-to-income ratio: 2.55
Income needed: $45,793
Median nonhomeowner income: $49,000

Kentucky

Percentage of nonhomeowners able to afford a starter home: 50.7%
Starter home value: $125,000
Starter home price-to-income ratio: 2.89
Income needed: $42,280
Median nonhomeowner income: $43,300

Oklahoma

Percentage of nonhomeowners able to afford a starter home: 49.9%
Starter home value: $120,000
Starter home price-to-income ratio: 2.69
Income needed: $44,969
Median nonhomeowner income: $44,600

Louisiana

Percentage of nonhomeowners able to afford a starter home: 48.9%
Starter home value: $124,000
Starter home price-to-income ratio: 3.26
Income needed: $39,114
Median nonhomeowner income: $38,000

New York

Percentage of nonhomeowners able to afford a starter home: 47.7%
Starter home value: $200,000
Starter home price-to-income ratio: 3.33
Income needed: $63,386
Median nonhomeowner income: $60,000