High home prices, rising mortgage rates make it tough to be a first-time homebuyer now. Here’s why location matters

Prospective buyers looking to secure the purchase of their first home this spring will still face a difficult market.

Yet there are signs some areas of the country may provide more opportunity for prospective owners shopping for their first piece of real estate. A new Bankrate ranking found the Austin, Texas, metro area is the best for first-time purchasers, while the worst is Washington, D.C.

The ranking of 50 metropolitan areas was based on affordability, which was given a 40% weight; job market, 30%; market tightness, 15%; and wellness and culture, 15%.

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Kansas City, Missouri, came in second in the ranking of best cities for prospective homebuyers, followed by Raleigh, North Carolina; Minneapolis and Jacksonville, Florida.

Austin’s high ranking was “surprising,” given that affordability dragged down its score, noted Jeff Ostrowski, analyst at Bankrate.

“Affordability is a challenge in Austin, but it’s not as challenging as in a lot of the California markets or in places where wages just haven’t kept up with home prices,” Ostrowski said.

Yet Austin and certain other major cities are poised to see double-digit declines in home prices as supply outpaces demand, according to recent research from Goldman Sachs.  

Home prices in Austin are projected to decline 19% from the fourth quarter of 2022 to the fourth quarter of 2024, the firm said. Prices in Phoenix, San Francisco and Seattle are projected to fall 16%, 15% and 12%, respectively, over the same time period.

Six of the 10 best metro areas in Bankrate’s rating were in Texas, Florida or Missouri, while six of the 10 least affordable metro areas were in California.

Boston, New York City, San Diego and Riverside, California, joined Washington at the bottom of the ranking.

First-time homebuyers now face several challenges: high home prices, rising mortgage rates and limited inventory in many locations.

“It’s tough to be a first-time buyer right now,” Ostrowski said. “The affordability equation is difficult.”

Affordability is still the No. 1 challenge for first-time homebuyers, said Zillow senior economist Orphe Divounguy. Yet home ownership remains key to building wealth in this country, he noted.

“The best advice for first-time homebuyers is to look at those markets that are relatively more affordable,” Divounguy said. “Look for markets where you’re going to have more bargaining power.”

Zillow recently put out its own list of best metro areas for first-time homebuyers in 2023.

The list includes Wichita, Kansas; the Ohio cities of Toledo, Akron and Cleveland; Syracuse, New York; Tulsa, Oklahoma; Detroit; Pittsburgh; St. Louis and Little Rock, Arkansas.

“You have to start with knowing what you can afford,” Divounguy said.

Working with a mortgage professional and realtor can help first-time homebuyers get a sense of what best fits their budget, he said.

These other tips may also help:

1. You don’t necessarily have to put 20% down: Most buyers do not put 20% down when buying a home, according to Divounguy. The median buyer typically puts around 10% down, he noted. Moreover, some first-time homebuying programs make it possible to close a deal with as little as 3%. It is possible to get a Federal Housing Administration loan for 3% or 3.5%, Ostrowski noted. “That’s not necessarily ideal, but it’s also not terrible either,” he said.
2. It’s wise to anticipate closing costs: It’s a good idea to have extra cash on hand to pay for closing costs, Divounguy said. Working to improve your credit score will also help you secure better terms for your mortgage loan, he said.
3. Make sure you’re financially and mentally prepared: It’s also wise to make sure your purchase won’t leave you house poor. “You don’t want to stretch so far to buy a house that you then can’t afford to replace the refrigerator, or you panic if your homeowner’s insurance spikes,” Ostrowski said. One strategy you might want to consider is having roommates to help share the financial burden, he said.
4. Be strategic when considering location: While more affordable markets may be easier to get into, the risk is that your property may not appreciate as much, Ostrowski said. More expensive markets may take more sacrifice to get into, he noted. “You’re squeezed to get in, but hopefully your investment will pay off over time.”