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tarter homes are attracting significant buyer interest in July, according to a recent report by Redfin. While overall market activity remains tepid, starter homes are drawing more interest as mortgage rates continue to trend lower and inventory rises. Pending sales for starter homes increased more than 10% in July compared to the same period last year, reaching their highest level in nearly two years. This is in contrast to a decrease in pending sales for other home tiers of between 6-10% over the same period.

    Sale prices of starter homes also increased, albeit at a slower pace than other home segments. This suggests a more balanced inventory and demand in the lower price tiers. Redfin defines starter homes as those with a sale price in the 5th-35th percentile.

    Redfin Senior Economist Sheharyar Bokhari attributes this trend to the recent drop in mortgage rates, which is a significant factor as first-time buyers make up a significant portion of the starter home market and are more sensitive to rate drops. While more buyers lead to more sales, prices are not skyrocketing due to the rising number of homes hitting the market, which is sufficient to satisfy the increased demand.

    Active listings for starter homes increased significantly in July compared to a year ago, up 18.9% compared to a 9% increase for luxury homes, a 4.1% increase for middle-tier homes, and a 1.6% increase for upper-tier homes. Texas offers the most choices, with San Antonio having the biggest year-over-year growth in active listings at 50.2%.

    Despite being the most expensive markets analyzed, starter home sales in San Francisco and San Jose increased by 18.7% and 14.5% respectively, where the median sale price for a starter home is roughly $950,000. Starter homes in Seattle sold the fastest, with a median of just seven days on the market, while starter homes in Fort Lauderdale stayed on the market for 81 days.

    While the boost in pending sales for starter homes is a positive sign, it has not been enough to significantly boost the overall real estate market. Affordability improved in July, but it remains 92% lower compared to pre-pandemic levels in February 2020, according to a report from First American. Modest improvements may not be enough to significantly boost demand as household incomes remain stretched relative to mortgage payments.