The price of a typical starter home fell in San Francisco, Austin, and Phoenix, bucking a national trend — here's why

• The cost of starter homes has grown in every US metro but three since last year, Redfin said.
• San Francisco, Austin, and Phoenix starter home prices declined by 13.3%, 12.2%, and 9.7%, respectively.
• A Redfin economist said these markets have cooled as higher interest rates deter prospective buyers.

Bucking a national trend, starter-home prices in San Francisco, Austin, and Phoenix are declining this year as homebuyer migration slows and the remote-work wave dies down.

A new report from Redfin identifies the three metros as the only in the country where the price of starter homes, defined as the 5th to 35th percentile of homes by sale price, declined year over year. Going along with that, they're also the only three metros where the income needed to purchase a starter home declined.

That doesn't mean that these starter homes are cheap, or the incomes needed to afford them are minuscule. According to Redfin, the median sale price of a starter home in San Francisco decreased 13.3% to $910,000; in Austin, decreased 12.2% to $347,300; and in Phoenix, decreased 9.7% to $325,000. The incomes now needed to afford those homes amount to $241,200, $92,000, and $86,100, respectively.

Sheharyar Bokhari, a senior economist with Redfin, told Insider that each of these markets are experiencing whiplash after several years of robust buyer demand and price growth. 

"Home prices in these cities rose the fastest in the country when interest rates were low, but when interest rates went up really high and quickly, those prices were not completely sustainable," Bokhari said. "So, they're moving first, in terms of price declines."

San Francisco, which is one of the fastest-cooling housing markets in the nation, has seen its median listing price fall 8.8% year over year to $1.4 million as of June, according to data from Redfin. Homes that are listed for sale are typically spending an average of 26 days on the market, compared to 18 days during the same time period in 2022.

"With mortgage rates being so high, not as many people are making that decision to buy a home in San Francisco right now," Bokhari said. "I think the story there is that demand is just gone." 

San Francisco has faced mounting issues, from millions of square feet of empty office space to "an epidemic of negative headlines that are keeping tourists and workers away," Manus Clancy, a senior managing director at Trepp, previously told Insider. 

Austin has a similar story to San Francisco. The metro — which has blossomed into a bonafide tech hub over the past decade as companies like Apple, Google, Oracle, and Tesla have established headquarters in the area — has seen a drastic pullback in demand, even though it was a top destination for migrating homebuyers in 2021. 

"In the beginning of the pandemic, people moving into Austin were paying so much above the asking price that home values rose really fast," Bokhari said. "However, people are now returning to offices and not moving in as much." Local incomes won't support those higher home prices so sellers are now reducing their prices to attract buyers, he said.  

Phoenix is the outlier of the bunch. The city is still seeing great demand from migrating buyers, despite its vulnerability to droughts. According to Redfin, it was the top market for buyers looking to relocate in June. 

So what's driving the city's home price declines? Similar to Austin and San Francisco, Bokhari chops it up to the ebb and flow of supply and demand. 

"There were a lot of iBuyers in Phoenix and when rates went up, those investors made losses on their properties," he said. As demand falls and interest rates remain high, those investors are trying to reduce their presence in the market, which has helped to bring prices back down.

While starter home prices decreased in San Francisco, Austin, and Phoenix, Redfin found that the typical starter home sold for a record $243,000 in June. That's up 2.1% from June 2022 and up more than 45% from the same time period in 2019. For the average first-time buyer, that means an annual income of about $64,500 is needed to comfortably afford the purchase of a starter home — $7,200 more than in 2022.

"As prices for the most affordable homes continue to climb and rates remain elevated, it's becoming more true that you have to be wealthy to buy a home — especially if it's your first one," Bokhari said in a statement.