Housing’s K-shaped economy lifts luxury, stalls starter-home sales

The availability of lower-priced homes for sale is increasing, but that doesn’t mean buyers can afford them, new research suggests.

Sales of starter homes fell 5.4% in May compared with a year earlier, despite there being 4.5% more available, according to a report from real estate firm Zillow. The typical value of a starter home — defined as the lowest-priced third of properties — was $202,000 nationally in May, up 2.3% from the same month in 2025.

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

“Even with subdued rent growth, inflation is eating into other parts of household budgets, making it harder to save for a down payment,” Ng said.

At the same time, sales of luxury homes — those in the top 5% of values and worth about $1.9 million nationally — were up 6.2% year over year in May, according to the report.

“The pattern mirrors a broader economic divide, with stock market gains supporting demand at the high end while rising everyday costs weigh on potential starter-home buyers,” Ng wrote in the report. 

In other words, the housing market mirrors a broader K-shaped economy, a term many economists use to describe the gap between higher-income households, who are experiencing stronger gains in wealth and spending, and lower-income consumers, who face financial pressures from the cost of living.

While home price growth has slowed, the median price of an existing home reached an all-time high of $440,600 in June — 49.2% higher than in June 2020 — according to the National Association of Realtors. June’s median is 1.8% higher than a year earlier, a rate of growth far below the double-digit annual increases seen during the pandemic housing boom.

Higher mortgage rates also contribute to ongoing affordability problems for potential homebuyers, experts say. The average interest rate on a 30-year fixed-rate mortgage was 6.75% as of Wednesday, according to Mortgage News Daily. Rates had dipped below 6% in late February, but the onset of the Iran War and the accompanying specter of inflation 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 for real estate company Redfin.

“Hypothetically, if mortgage rates were to drop to, say, 5%, that would make buying a home much more affordable,” Fairweather said. “You would see instantaneously an increase in sales and more people buying and then more people selling.

“But I think it’s pretty far-fetched at this point to rely on that happening,” she said. “Interest rates are looking like they will be higher for longer.”

The impact of an interest…