“Mortgage rates dropped significantly this week, providing some relief to homebuyers even as home prices are reaching new record highs. According to the mortgage finance provider Freddie Mac, the 30-year fixed mortgage rate plunged to 2.78% from 2.88% the previous week.
Nevertheless, many first-time homebuyers are being priced out despite these historically low mortgage rates. While inventory is especially limited in the price range of a starter home ($270,500), the affordability gap between first-time homebuyers and all buyers is 34%. To put it simply, buying the typical starter home is more expensive for a first-time homebuyer than it is for any other buyer to purchase the typical home, even though the starter home is less expensive. According to NAR, the affordability index for first-time homebuyers was 116.8 compared to 177.4 for all buyers as of the first quarter of 2021. Keep in mind that a higher index translates to a better affordability.
Thus, building more starter homes could help more renters to become homeowners. First-time homebuyers who bought their starter home 3 years earlier have already built more than $60,000 in equity due to the price appreciation.”