In most metro areas around the U.S., homes in the entry-level market segment have appreciated the quickest in the last year. The price between most and least affordable homes is growing wider, suggesting a great deal of competition between buyers searching for an affordable home.
The U.S. property market has performed strongly in every aspect. In February 2021, year-over-year home values continued to rise across all segments of the market.
Aggregated national year on year home price rises:
- Bottom Third Tier: $129,158 to $141,832, +9.8%
- Middle Third Tier: $247,973 to $272,446, +9.9%
- Top Third Tier: $490,944 to $537,815, +9.5%
When looking at numbers, the aggregated national data looks relatively even between the segments. However, since real estate is local, a different picture emerges. In 44 out of 50 metro areas, the home value rose quickest in the most affordable section, in some cases quite dramatically.
For example, in February, Boise posted year-over-year growth of 27.2% in bottom-tier homes. Similarly, Phoenix (19.4%) and Spokane (18.4%) also appreciated significantly.
Why are Affordable Homes Growing Quickest?
The trend of rapid growth in the most affordable market segments is typical. Because of high demand and low inventory, U.S. home prices have been on the rise over the last decade.
However, as this gap widens, the intense competition between buyers at the lower scale is more noticeable. A rising market puts homes out of reach for some citizens, with mid-Western metros particularly affected.
The Picture Across the Nation
The change in home growth values is particularly striking in Cleveland, Detroit, and Indianapolis. In Cleveland, the bottom third of the market grew year-over-year by 13.1%, with the top third gaining 9.8%. This gap of 3.3% is more than double from the year before. For many analysts, this is a strong indication that historically low interest rates drive the demand for starter homes.
What Does This Mean for The Market?
The disproportionate growth in market segments represents a set of challenges and opportunities. For renters already struggling to save enough to meet down payment and closing costs, sharp rises in home value are difficult.
However, those who already own homes in the more affordable segment will appreciate the rapid growth of their home equity. In theory, this could mean that entry-level homeowners can sell and take advantage of the growth in their home equity and purchase a larger home. Although, the low-inventory market leaves them with few options that would be ideal.
Is this Trend Set to Increase?
The Zillow Home Value Index (ZHVI) measures the gap in appreciation rates between homes in the market’s top and bottom tiers. Currently, the ZHVI suggests that this gap is far from average. In fact, in some markets, the gap has closed this year.
Boise, Charleston, and Dallas are three metros where the gap between the bottom and the top-tier homes has closed year-over-year. While the bottom tier is still growing fastest, the gap between the tiers is tightening since mid-2020.
Bottom-tier home value in Boise grew 27.2% year-over-year for February. Prices leaped from $246,131 to $313,007. However, top-tier homes were also up from $476,853 to $600,043, a rise of over 25.9%. This difference of 1.3 percent is an improvement compared to February 2020’s relative growth, which stood at 2%.
Austin, becoming a popular migration destination, has seen its top-tier house prices increase steadily over the last decade. Top-tier houses are up by 14.9%, with mid-tier at 14.5% and lower-tier homes at 14%.
There is still value in the Austin property market for many analysts, which partially explains the steady growth. The city will soon welcome Google, Tesla, and Oracle to an already bustling job market attracting high-income home buyers.
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