K-shaped housing market splits as starter-home sales fall 5.4%

Starter-home sales fell 5.4% in May even as inventory rose 4.5%, while luxury purchases climbed 6.2% — a K-shaped split in the U.S. housing market.

The U.S. housing market is splitting along income lines, with starter-home sales falling 5.4% in May despite 4.5% more inventory while luxury purchases rose 6.2%, Zillow data show.

"Starter-home buyers have more choices, more price cuts and less competition, but the unfortunate reason for that advantage is that they are either unwilling or unable to purchase a home," said Kara Ng, senior economist at Zillow and author of the report.

The typical starter home — the lowest-priced third of properties — was worth $202,000 nationally in May, up 2.3% from a year earlier. One in four starter-home listings cut its asking price in June, versus 20.6% of luxury listings, while inventory jumped 52% in Memphis, 33% in Buffalo and 32% in Louisville, Zillow said.

The divide mirrors a broader K-shaped economy, with stock-market gains supporting high-end demand while inflation and near-7% mortgage rates squeeze first-time buyers. The average 30-year fixed mortgage rate was 6.75% as of the report date, according to Mortgage News Daily, translating to a $1,310 monthly principal-and-interest payment on a $202,000 loan — versus $1,084 at 5%.

Rates and costs keep first-time buyers on the sidelines

Higher borrowing costs compound affordability pressures. The median price of an existing home reached an all-time high of $440,600 in June, up 49.2% from June 2020 and 1.8% year over year, according to the National Association of Realtors. Rates dipped below 6% in late February before the onset of the Iran War and the accompanying inflation concerns pushed them higher.

"Buyers are also up against these nearly 7% mortgage rates currently, and can't afford to buy at these high rates and high prices," said Daryl Fairweather, chief economist at Redfin. "Hypothetically, if mortgage rates were to drop to, say, 5%, that would make buying a home much more affordable. You would see instantaneously an increase in sales."

Property taxes and insurance, often bundled into monthly payments, have also risen sharply since 2019, according to Cotality, a property data firm. For luxury buyers, rates matter less — they "can sell stock or liquidate assets in order to buy a home without having to even get a mortgage in the first place," Fairweather said. The contrast is sharpest in San Francisco, where luxury sales jumped 21.6% from a year earlier even as starter-home sales slipped 1.2%, Zillow found.

Supply relief is coming, but slowly

The bipartisan 21st Century ROAD to Housing Act, signed into law in July, combines dozens of measures to encourage construction, expand financing access and restrict purchases by large institutional investors. Yet benefits will take time: as of 2025, the U.S. faced a shortage of more than 4 million homes, according to Realtor.com.

Lower mortgage rates would be the clearest path to unlocking demand, but economists see little near-term relief. "Interest rates are looking like they will be higher for longer," Fairweather said. A drop to 5% would cut the monthly payment on a $202,000 loan to $1,084 from $1,310, yet markets are not pricing such a move.

For first-time buyers, the window is real but conditional: those with a down payment and a strong credit score can negotiate seller credits, closing-cost assistance and rate buydowns that were unthinkable in 2021 and 2022. Yet with the median home at $440,600 and rates near 7%, the monthly math still excludes many households — a gap that only lower rates or faster supply growth can close. For young buyers, affordability may require a tradeoff, Fairweather said. "One of the dilemmas for young people is that they kind of have to choose: Do they want to live somewhere that has the best job opportunities, or do they want to live where home ownership will be much easier to access at a younger age, but they might not earn as much over their lifetime because of that choice."

This article is for informational reference only and does not constitute professional or investment advice. Mortgage rates and market data reflect the report date; verify current figures against the latest official announcements before making decisions.