Bidding Wars Heating Up for Starter Homes

A new report from Zillow has found that entry-level home shoppers are dealing with faster-rising prices and more competition than those seeking more expensive homes.

"Buyers shopping for the least-expensive homes this spring aren't noticing much difference from the pandemic-era market heat," said Skylar Olsen, Zillow's Chief Economist. "Competition is fierce, but there aren't many homes for sale, so buyers should be patient but prepared to move quickly and anticipate a bidding war once they find a home they love."

Typical home values for the least-expensive one-third of houses rose 8%–nearly $13,000–over the past year. Mid-level homes appreciated by 3%, and the most-expensive houses depreciated by 1%, the first loss of value for the top tier since 2012. Zillow reported that entry-level homes have exploded in value over the course of the pandemic across the U.S., gaining at least 60% more value since February 2020 in seven of the 50 largest markets, with Tampa, Florida; Richmond, Virginia; and Charlotte, North Carolina leading the charge.

The study found that mortgage rate hikes did more damage to monthly payments as home prices rise. This helps explain why top-tier home values are falling fastest annually in some of the most-expensive markets: San Francisco (-14%), San Jose (-11%), and Seattle (-11%).

A slight annual recovery in housing inventory has left out entry-level shoppers, as there are just 1% more homes available for sale in the bottom price tier, compared to 8% and 13% more in the slower-moving middle and top tiers, respectively.

Rate lock is contributing to a lower flow of new listings across price tiers. March saw record-low new listings for this time of year, down 22% from last year. But rate lock is having the biggest impact on entry-level buyers in expensive West Coast markets. San Jose, San Francisco, Sacramento, Portland, and Seattle all have fewer than half as many new bottom-tier listings in March compared to last year.

In the recent past, entry-level shoppers had an easier time finding discounts than their well-heeled colleagues, but that comparative benefit is gone now, too. The share of mid- and top-tier homes that sold above list price rose far above the bottom-tier share through most of the pandemic. Super-low rates had cranked up demand for more-expensive houses. But after mortgage rates peaked at 7% last fall, the share sold above list price for all three tiers converged; now they're tracking together.

Click here for on Zillow’s analysis of entry-level home shoppers.