Starter homes have become nonstarter homes for many Americans. Three-quarters of the homes currently listed for sale are out of reach for median-income earners, according to a recent analysis from Bankrate.
The lack of buyers, however, is reshaping the investment landscape for small investors, who are buying up single-family homes in record numbers.
Affordability Is Slipping Away
Using the metric that standard housing costs should not exceed 30% of gross income (before taxes), according to Bankrate, the typical U.S. household earns around $80,000 per year, but would need to make around $113,000 to afford a median-priced house. This, according to brokerage Redfin, is about $440,000, a figure that varies markedly by city. With mortgage rates just above 6%, affordability is pushing buyers out of the market.
“The people who you know are finding homeownership to be easier either have higher income, or they have family members who can help,” Chen Zhao, head of economics research at Redfin, told Bankrate. “There are also those who bought a home before 2022. If you were part of that group, you got pretty lucky.”
According to the National Association of Realtors, only 24% of housing sales in 2024 were by first-time homebuyers. In 2010, the number was 50%.
“Only a sliver of the housing market is affordable to the typical household,” Bankrate data analyst Alex Gailey told CBS News. “That’s when homeownership starts to feel less like a common middle-class milestone and more like a luxury.”
Behind the affordability issue lies a severe lack of supply, which, according to investment bank Goldman Sachs, is short by around 3 million to 4 million homes beyond normal construction.
A Renter Nation Mindset
The affordability issue has been prevalent for the past three years, since interest rates first started to climb. Now, the renter nation mindset appears baked into many who have given up on owning a home.
According to a study by Northwestern and the University of Chicago, Americans who were born in the 1990s “will reach retirement with a homeownership rate roughly 9.6 percentage points lower than that of their parents’ generation.”
A Pew Research Center analysis examined where younger Americans, aged 25 to 34, still lived with their parents in 2023. Unsurprisingly, expensive cities in Texas, Florida, and California showed the highest percentage of young adults living at home, with young men more likely to do so than young women.
Luxury Condos Aren’t Helping
Although adding new housing has alleviated the supply issue in some areas, particularly the Sunbelt, many of these new condos are too expensive for first-time homebuyers, who can do without a slew of amenities and luxury finishes that push the units out of the “starter home” price range.
The Renter Sweet Spot
For landlords to appeal to the vast swathe of renters unable to get on to the property ladder, they must speak directly to their wallets.
In 2024, USAFacts estimated that the U.S. renter household paid a median of about $1,490 per month in rent, which equaled 32.8% of median renter income, though these figures varied by location. Mortgage trade publication Scotsman Guide, citing the Census Bureau, said that over half of all renter households (50.3%) are burdened by housing costs and spend over 30% of gross income on housing.
To work out how much a prospective tenant can reasonably afford, the simple rule of thumb for landlords is to multiply their gross monthly income by 0.3%. So if they earn $5,000 (before deductions), they should be able to afford around $1,500 in rent. For many landlords who ignore what prospective tenants can afford, the rude awakening of a vacant apartment, followed by a drop in rent, is a reality in many cities.
“Rent continues to fall in many of the major metros across the United States for a variety of reasons,” Joel Berner, a senior economist at Realtor.com, said. “The biggest one is that rent is still correcting itself from the dramatic run-up of 2021 and 2022, when several years’ worth of rent gains were seen over the span of a few months.”
Renting Is Still Cheaper Than Buying
Even if prospective tenants could afford the down payment to buy a home, renting is still cheaper than buying. Realtor.com quotes a median mortgage payment of $2,040 versus $1,693 for rent. Only a sizable drop in interest rates and greater supply will bring about some parity.
For minimum-wage earners, the situation is even more dire, with just five of the top 50 metros being affordable for those earning minimum wage. Escalating rents have not, for the most part, been due to small mom-and-pop landlords, who own the majority of rental housing in the U.S., but rather to corporate landlords.
Rents Are Down
“The corporate landlord invasion or the financialization of rental housing is the most significant factor fueling these rental housing challenges,” Dr. David Jaffee, professor of sociology at the University of North Florida and founder of Jax Tenants Union, told Realtor.com of his local market in Jacksonville, Florida.
“Add on the rising cost of the other basic necessities, and workers will still be falling behind,” adds Jaffee. “At best, rents will stabilize at their already inflated levels.”
Overall, rents are down. Apartment List says the national median rent dropped 1% in November to $1,367, around $300 less than Realtor.com’s present-day figure, marking the fourth consecutive month of decline.
“That 18-to-34-year-old group … I think it’s up to 32.5% of those now are living with family, and that’s the highest it’s been in a while,” Grant Montgomery, CoStar’s national director of multifamily analytics, told CNBC. “I think it reflects high rental costs that have risen over the years, as well as the tougher job market for young folks just coming out of college.”
Strategies for Investors to Find Deals and Increase Cash Flow
For smaller landlords to compete with Wall Street for investments, the key is to be nimble, think outside the box, and act fast.
These are a few strategies to employ. Some of these techniques have been around for a while and have run aground amid the inventory drop, but many buyers are still finding some success:
- Look to off-market deal flow: Run direct-to-seller campaigns (letters, SMS, door knocking) targeting absentee owners, older landlords, and properties with liens or code issues that are not yet on the MLS.
- Use data tools like PropStream to build lists.
- Work with specialized agents and wholesalers to find distressed or hard-to-sell homes.
- Use creative financing: Sellers of hard-to-sell properties may be willing to entertain seller-financing terms if it helps move their problem properties. Consider subject-to and conventional note-holding deals.
- Add ADUs to single-family homes: ADUs have been a game-changer for many people, allowing them to earn more income without altering the structure of an existing home. The good news is that Fannie Mae has broadened its financing options for single-family homeowners who wish to add an ADU.
- Other options to increase income include converting basements, attics, or garages into existing buildings, or renting by the room, so long as it adheres to code.
Final Thoughts
There’s no getting around the supply issue, but not every young adult has a parent they can stay with, and neither, for that matter, does an older adult always have a place they can afford.
Being a successful landlord in the current cash-squeezed environment means knowing how to compromise on rents by buying under-market, adding sweat equity, or adding additional units for minimal cost. The government is also bending over backwards to bring more housing to the market and has a number of different loan products worth investigating.
The best strategy is to live to fight another day and weather the current affordability storm, while making the most of tax advantages, equity appreciation, and loan paydown.
