Is There Still Such a Thing as a Starter Home in This Economy?
With home prices steadily rising in recent years, many people are beginning to wonder whether starter homes have become a thing of the past. Well, the good news is that starter homes still exist. However, they may look a lot different now — and much more expensive.
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According to a Freddie Mac study released during the pandemic, the share of starter homes among all new construction declined from 40% in the early 1980s to around 7% in 2019. In 2020, only 65,000 new entry-level homes were completed.
What’s the Definition of a Starter Home?
A starter home is usually the first property a person or family can afford to purchase. It tends to be smaller and less expensive, and can be a condo, townhouse or stand-alone structure. Most people live in these starter homes for two to five years until they see a return on their investment and save up enough to purchase their forever homes.
Missy Derr, real estate advisor with Engel & Völkers, defined a starter home as an opportunity to move on to the next home. “It’s a vessel for financial stability that can render itself as the stepping stone to purchasing the next larger, better situated and equipped home, so it may not be as large as you want and may not be in your dream area,” she explained.
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Do Starter Homes Still Exist Today?
Yes, starter homes still exist, but the idea of buying an entry-level home that quickly appreciates in value so you could sell it in a few years seems to have gone out the window. In other words, while the definition of a starter home hasn’t necessarily changed, these properties are more challenging to find and less affordable than they were decades ago.
Derr believes that the combination of the following factors has contributed to the changes in our current housing market:
Investors and big corporations are gobbling up homes, resulting in a rise in home values and, ultimately, the price of rent.
The rising price of rent negatively impacts the average American’s ability to save for a down payment.
Borrowing money has become more expensive — the national average APR for the benchmark 30-year fixed mortgage rose to 7.16% at the start of 2024.
Affordable housing, on the whole, is not a priority for builders as their profit margins decline, and they need to position themselves for bigger and better sales.
As a result, first-time homebuyers are older, make up a smaller portion of all buyers, and tend to live in the property for longer. According to a 2022 survey by the National Association of Realtors, first-time buyers made up only 26% of all buyers, down from 34% in 2021. The age of the typical first-time buyer was 36 years — up from 33 years the year prior. And the median expected home tenure for first-time buyers was 18 years, the highest ever recorded and up from 10 years in 2021.
Housing Prices Now vs. When Baby Boomers Purchased Their First Homes
After adjusting for inflation and comparing the growth in wages and housing costs, we found that housing costs have grown much faster than wages since the 1980s, when most boomers could purchase their starter homes.
In January 1984, the average home cost was $65,341, which when adjusted for inflation, is about $198,989. Fast forward four decades, the average home cost as of January 2024 is around $397,378.
The U.S. minimum wage in January 1980 was $3.10, which, when adjusted for inflation, equates to approximately $11.67 in 2024 dollars. Today, the U.S. minimum wage is $7.25.
So, if you’re earning the minimum wage today, your purchasing power is less compared to the 1980s when adjusted for inflation. And with housing prices more than doubling compared to four decades ago, it’s no wonder that millennials and Gen Z are struggling to afford a starter home.
What To Do If You’re Struggling To Find Starter Homes That Fit Your Needs
Finding a starter home that fits your needs may be more challenging than before, but it’s not impossible. Here are a few strategies to help you secure your first property.
1. Expand Your Target Areas
Derr believes that while loving where you live is important, you should place a higher emphasis on the future of the area you’re buying in. “Look at up-and-coming areas that have numerous flips and community improvements, and you’ll see values rise,” she said.
It’s easy to gravitate toward finding a starter home in established neighborhoods, but it’s crucial to recognize that even those places underwent phases of transformation. So, instead of solely focusing on the present charm of a neighborhood, expand your target areas and consider up-and-coming neighborhoods with potential for growth and improvement.
2. Think Outside the Box
“If the home is in your dream area but is not exactly your taste, get creative and consider renovating it,” Derr said. She shared that she recently found her client a home at approximately $500,000 in a highly desirable area where properties generally start at a million dollars.
The catch was the home only had two bedrooms and one bathroom. The upside was that besides the price point, the lot allowed for the home to be expanded to two stories. “My client bought a home that can now grow with him and with his wallet. After renovations or expansion, that starter home will create an amazing opportunity for him in the future,” she added.
3. Get Clear on Your Wants vs. Needs
“When my team works with buyers, we first get clear on their needs, a.k.a. stuff they can’t live without. These are the things we focus on, especially in a tight market. Anything on the wants list is just icing on the cake,” said Ashley Oshinsky, founder and principal associate broker of Higher Living Real Estate.
So, before you start house hunting on Zillow, take the time to write down what you can’t live without vs. what would be nice to have. This clarity not only helps you manage your budget better but ensures you’re not overwhelmed by the gazillion choices out there.
Note: Home price data was sourced from DQYDJ and the minimum wage was from the U.S. Department of Labor.
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This article originally appeared on GOBankingRates.com: Is There Still Such a Thing as a Starter Home in This Economy?
