U.S. $1M Starter Homes Warn of Deepening Income Inequality and Emerging Housing Disparities

The price of a starter home has exceed­ed $1 mil­lion in over 100 U.S. cities and towns, accord­ing to the lat­est Zil­low data. The nation­al aver­age for a starter home has now reached $196,611, a 54.1% increase over the past five years. This rise sig­nif­i­cant­ly out­paces the 49.1% increase in over­all home prices. Simul­ta­ne­ous­ly, the aver­age cost of all homes has risen to $412,300, up 28% since the sec­ond quar­ter of 2020. This trou­bling trend, cou­pled with esca­lat­ing rents and mort­gage rates, under­scores a deep­en­ing income inequal­i­ty and grow­ing hous­ing dis­par­i­ties, mak­ing home­own­er­ship increas­ing­ly elu­sive for many Amer­i­cans, par­tic­u­lar­ly those from his­tor­i­cal­ly mar­gin­al­ized groups.

A Starter Home or a Pipe Dream?

The con­cept of a starter home tra­di­tion­al­ly evoked images of mod­est, afford­able prop­er­ties that pro­vid­ed a foothold for first-time buy­ers in the hous­ing mar­ket. Own­ing a lit­tle house on a plot of land had once become syn­ony­mous with the Amer­i­can dream — a sign of pros­per­i­ty and social mobility. 

Builders like entre­pre­neur Abra­ham Levitt and his two sons, William and Alfred, mass-pro­duced small homes post-World War II, espe­cial­ly to address the severe hous­ing short­age for return­ing vet­er­ans. These homes, typ­i­cal­ly 800 to 1,000 square feet with sim­ple inte­ri­ors, were more afford­able and often in need of a lit­tle TLC. How­ev­er, the real­i­ty today is stark­ly different. 

Accord­ing to Zil­low, the aver­age price of a starter home has soared by 54.1% over the past five years, out­pac­ing the over­all rise in home prices, which stood at 49.1% dur­ing the same peri­od. In 1947, starter homes cost $8,000 to $12,000, equiv­a­lent to $109,000 to $168,000 today. 

In con­trast, in more than 100 cities and towns across the U.S., the price tag for a starter home has now crossed the $1 mil­lion mark. Cal­i­for­nia, New York, and Wash­ing­ton are lead­ing this trend, with Cal­i­for­nia alone hav­ing 71 cities where a starter home is now priced over $1 mil­lion. This sharp increase in starter home prices has fun­da­men­tal­ly altered the hous­ing mar­ket’s acces­si­bil­i­ty, mak­ing the notion of own­ing a starter home increas­ing­ly resem­ble a pipe dream for young and first-time buyers.

The Impact on Black Families

The dis­par­i­ty in home­own­er­ship rates between Black and white fam­i­lies is one of the most glar­ing exam­ples of how these ris­ing home prices are inten­si­fy­ing exist­ing inequal­i­ties. A recent study by Redfin high­lights that Black fam­i­lies can afford starter homes in only 10 of the 50 largest U.S. met­ro­pol­i­tan areas. In stark con­trast, white fam­i­lies can afford starter homes in 32 of these areas.

In cities like San Fran­cis­co, the sit­u­a­tion is even more dire. A Black fam­i­ly earn­ing the local medi­an income would need to allo­cate 104% of their earn­ings just to afford a starter home. This is not just unaf­ford­able — it’s impos­si­ble. The same study found that nation­wide, a Black fam­i­ly earn­ing the medi­an U.S. income would have to spend 41% of their earn­ings on hous­ing costs for a typ­i­cal starter home. Mean­while, a white fam­i­ly would only need to spend 26% of their income for the same property.

These sta­tis­tics are not just num­bers — they rep­re­sent real peo­ple being priced out of the Amer­i­can Dream. The racial wealth gap, com­bined with a his­to­ry of dis­crim­i­na­to­ry prac­tices in the hous­ing mar­ket, has left Black fam­i­lies par­tic­u­lar­ly vul­ner­a­ble to these mar­ket shifts. This is reflect­ed in the broad­er home­own­er­ship sta­tis­tics, where the home­own­er­ship rate for Black Amer­i­cans stands at just 44%, com­pared to 72.7% for white Americans.

The Role of High Mortgage Rates

The Fed­er­al Reserve’s tight mon­e­tary pol­i­cy, aimed at curb­ing infla­tion, has also played a major role in the cur­rent hous­ing cri­sis. Mort­gage rates have been hov­er­ing at lev­els not seen in over two decades, mak­ing bor­row­ing more expen­sive and fur­ther stretch­ing the bud­gets of poten­tial homebuyers.

Many buy­ers are hold­ing off on jump­ing into the mar­ket, hop­ing to see low­er mort­gage rates or home prices lat­er this year,” not­ed Han­nah Jones, senior eco­nom­ic research ana­lyst at Realtor.com, as report­ed by Forbes.

But, while mort­gage rates have shown some signs of eas­ing, as pre­sent­ed in the chart above, they remain pro­hib­i­tive­ly high for many, par­tic­u­lar­ly first-time buy­ers who are already strug­gling to save enough for a down pay­ment. Accord­ing to the U.S. Depart­ment of Hous­ing and Urban Devel­op­ment, the nation­al medi­an fam­i­ly income for 2024 stands at $97,800.

The Nation­al Asso­ci­a­tion of Real­tors (NAR) report­ed that the medi­an price of an exist­ing home sold in June 2024 reached a record $426,900, and the medi­an age of first-time home­buy­ers has risen to 35, up from 34 in 2019. This delay in home­own­er­ship is large­ly due to the time it takes for young adults to save for a home, espe­cial­ly in an envi­ron­ment where prices con­tin­ue to soar and wages are not keep­ing pace. With a 20 per­cent down pay­ment and a mort­gage rate of 6.59 per­cent, the result­ing month­ly pay­ment of $2,179 would rep­re­sent 27 per­cent of the typ­i­cal fam­i­ly’s month­ly income.

The Supply and Demand Imbalance

At the heart of this cri­sis is the chron­ic short­age of afford­able hous­ing. The Covid-19 pan­dem­ic added to the already sig­nif­i­cant deficit in avail­able homes, par­tic­u­lar­ly in high-demand areas like Boston, Sacra­men­to, and Port­land, Ore­gon. Despite a ramp-up in con­struc­tion over the past few years, the sup­ply of new homes has not been suf­fi­cient to meet the grow­ing demand.

Builders have increased their efforts to address this short­age, but the focus has often been on more expen­sive homes, which offer high­er prof­it mar­gins. As a result, the con­struc­tion of entry-lev­el homes has lagged sig­nif­i­cant­ly. The Cen­sus Bureau report­ed that only 7% of homes built in 2019 were con­sid­ered entry-lev­el, a sharp decline from the 40% of homes built in 1980 that fell into this category.

Although hous­ing starts increased from under 1.3 mil­lion in 2019 to 1.6 mil­lion in 2021 and sta­bi­lized at 1.4 mil­lion in June, the con­struc­tion indus­try’s short­age of up to 500,000 work­ers has posed chal­lenges for even top home­builders in main­tain­ing qual­i­ty stan­dards across var­i­ous regions.

More­over, many of the areas expe­ri­enc­ing the high­est home prices have strin­gent zon­ing reg­u­la­tions that fur­ther restrict new hous­ing devel­op­ment. This com­bi­na­tion of high demand and low sup­ply has cre­at­ed a per­fect storm that dri­ves prices upward, near­ly extin­guish­ing the dream of home­own­er­ship for many Amer­i­cans and widen­ing the gap between the afflu­ent and those less well-off.

Is a Starter Home Worth It?

Giv­en these chal­lenges, prospec­tive buy­ers are ques­tion­ing whether pur­chas­ing a starter home makes sense in today’s mar­ket. The lat­est Bank of Amer­i­ca Home­buy­er Insights Report, con­duct­ed in col­lab­o­ra­tion with the Bank of Amer­i­ca Insti­tute, reveals that 70% of poten­tial home­buy­ers fear a lack of long-term invest­ment, while 72% wor­ry about ris­ing rents affect­ing their finances. The ben­e­fits of own­ing a starter home, such as low­er month­ly pay­ments and quick­er equi­ty build­ing, are increas­ing­ly over­shad­owed by fierce com­pe­ti­tion and the need for sub­stan­tial repairs or upgrades.

More­over, the costs asso­ci­at­ed with buy­ing and sell­ing homes — such as clos­ing costs, mov­ing expens­es, and pos­si­ble ren­o­va­tions — can erode any poten­tial equi­ty gains. A new sur­vey by Clever Real Estate found that Amer­i­cans spend near­ly $55,000 on home-sell­ing expens­es. This fig­ure sur­prised 64% of sell­ers, lead­ing 89% of recent sell­ers to regret their sale due to high costs cut­ting into their profits.

In light of these fac­tors, it may be more cost-effec­tive in many cas­es to save longer and pur­chase a larg­er, per­ma­nent home that can accom­mo­date future life changes, rather than mov­ing twice with­in a short period.

The Wealth Gap and Long-Term Economic Impact

The trend in the hous­ing mar­ket toward $1 mil­lion starter homes sig­nals deep­er issues with­in the U.S. eco­nom­ic sys­tem rather than reflect­ing a healthy econ­o­my. As home prices rise, wealth becomes increas­ing­ly con­cen­trat­ed among prop­er­ty own­ers, and this adds the income inequality.

This wealth gap is fur­ther widened by the faster appre­ci­a­tion rates of high­er-priced homes. A Zil­low analy­sis from 2021 revealed that while all homes appre­ci­at­ed sim­i­lar­ly in per­cent­age terms, high­er-priced homes yield­ed much greater absolute dol­lar gains. Con­se­quent­ly, home­own­ers in high­er price brack­ets build wealth more rapid­ly, entrench­ing eco­nom­ic disparities.

More­over, the deep­en­ing afford­abil­i­ty cri­sis is like­ly to lead to more pro­nounced region­al divides, with high-income areas becom­ing increas­ing­ly inac­ces­si­ble to mid­dle- and low­er-income fam­i­lies. This trend could result in sig­nif­i­cant eco­nom­ic seg­re­ga­tion with­in cities or regions, affect­ing social mobil­i­ty and eco­nom­ic diversity.

Between 1963 and 2022, wealth dis­tri­b­u­tion shift­ed notably: the 10th per­centile’s wealth grew from $23 in debt to $450, the 50th per­centile’s wealth near­ly quadru­pled, the 90th per­centile’s wealth increased more than six­fold, and the top 1% saw a sev­en­fold rise. From 2016 to 2022, the wealth gap nar­rowed, with the wealth of the top 1% decreas­ing from 107 times to 71 times that of the medi­an family.

The Future of the Housing Market

Look­ing ahead, the hous­ing mar­ket is set to encounter a defin­ing moment. The Fed­er­al Reserve is expect­ed to cut inter­est rates to 5.1% by the end of 2024, while the CME Group’s Fed­Watch tool fore­casts the first cut in Sep­tem­ber, which could offer some relief for mort­gage afford­abil­i­ty. How­ev­er, any sig­nif­i­cant reduc­tion in rates could also lead to a renewed surge in home prices, as more buy­ers flood the mar­ket in search of afford­able housing.

The long-term solu­tion lies in address­ing the sup­ply side of the equa­tion. More homes need to be built, par­tic­u­lar­ly in the entry-lev­el seg­ment, to meet the needs of first-time buy­ers. This will require not just an increase in con­struc­tion activ­i­ty, but also a reeval­u­a­tion of zon­ing laws and build­ing reg­u­la­tions that cur­rent­ly stymie devel­op­ment in many areas. For Black fam­i­lies and oth­er mar­gin­al­ized com­mu­ni­ties, tar­get­ed poli­cies aimed at clos­ing the racial wealth gap and address­ing dis­crim­i­na­to­ry prac­tices in the hous­ing mar­ket will be essen­tial. This includes expand­ing access to afford­able cred­it, pro­vid­ing down pay­ment assis­tance, and enforc­ing fair hous­ing laws more rigorously.

Thus, the emer­gence of $1 mil­lion starter homes typ­i­cal­ly reflects the grow­ing income inequal­i­ty in the Unit­ed States and high­lights how the hous­ing mar­ket has become increas­ing­ly inac­ces­si­ble to sig­nif­i­cant seg­ments of the pop­u­la­tion, such as young first-time buy­ers and Black fam­i­lies. The increas­ing dif­fi­cul­ty of home­own­er­ship could lead to a future where it — and the eco­nom­ic secu­ri­ty it pro­vides — becomes a priv­i­lege reserved for a select few, there­by affect­ing eco­nom­ic inequal­i­ty and social mobility.