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Ask Brian: Where Have All the Starter Homes Gone?

By Brian Kline | November 4, 2021

Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].

Question from Cora in AL: Hi Brian, my husband and I did some serious house hunting four years ago but couldn’t afford the monthly mortgage payments on his $18-an-hour construction worker salary. From everything that I have seen, it has only gotten much worst for first time buyers. The starter home seems to have become an endangered species. I’m 29 years old and my parents bought their first home about the time I was born. I don’t remember much about that house, but I’ve seen pictures and heard stories. My parents still talk about how it was an investment in their future.

The house was about 1,000 square feet with one medium size bedroom and two small bedrooms. There was a kitchen, living room, one bath, and a single car garage. It was in a neighborhood with other first time homeowners. It was ten years old and nothing fancy. We only lived in it for three years, but dad made a few improvements, the value went up, and we moved to a bigger house. Today, my parents live in a 3,200 square foot home in a gated community and my dad is planning for retirement in a few years from his hourly job.

I’ve heard that today a starter home in Alabama costs about $55,000. That is a price we could easily qualify for right now. We again looked at two last week. The foundation on one was crumbling and both needed new roofs. I don’t remember how old they are, but I’d guess both were built in the 1950s or 1960s. Here is my basic question, where have the starter homes gone that were everywhere when my parents were getting started?

Answer: Hello Cora. I feel for you. Being a first-time homebuyer these days can feel like a hungry dog begging for scraps. This country was built on homeownership that has historically meant that almost everyone first bought a starter home. Unfortunately, there are basic economic problems that have almost eliminated the construction of small homes over the past decade. One is the expectations of this generation of first-time buyers and the other is institutional construction companies that won’t consider a project for under $100 million. Big institutions are building most of the houses today. It’s become big business with a department of accounts counting the beans and telling executives what types of houses earn the most profit. The smaller the lot size and the bigger the house, the bigger the profit margin.

Starter houses not only used to be good for first-time buyers but also young entrepreneurs getting started in the home construction business. People (like your husband as a construction worker) would gain some experience with a father, uncle, or mentor in the business and after a couple of years venture out on their own to start building small houses. Often the first home for their own family and then maybe a single house for someone that inherited a plot of land on the edge of town. Soon, these new entrepreneurs would take on building several houses for a general contractor putting up a new development. In a couple of years, everyone was prospering. The new entrepreneur had a viable construction business and started building medium size homes. He would even build some for the first-time buyers in his original houses that were also ready to move up to bigger and better. But I’m daydreaming. Sorry to say Cora, but that isn’t happening much today.

The other side of the coin is this generation expects too much in a first home. But they are not being totally unreasonable. This is a generation that has already faced a lot of financial difficulties. Some of them saw their parents lose their dream of home ownership 12 years ago to foreclosure during the real estate meltdown. These young people became skittish about buying a home in their early 20s. Most couldn’t buy in their early 20s because of the Great Recession. They were fresh out of school but jobs were scarce and wages were flat. Today, many have a mountain of student debt, and a down payment combined with closing costs amounts to at least a half of a year’s wages. But not all of them did everything right. Plenty of them took on way too much credit card and car loan debt to the point of destroying their credit scores.

It seems at times like a fundamental shifting of the American dream. Instead of buying their first house at age 23, they ended up living in their parents’ basement or a small urban apartment with several roommates. Now, well into their 30s, they have families and want to buy a home several tiers up from a starter home. The big institutional builders are happy to oblige if first-time buyers can qualify for a $300,000 mortgage. Together, they have changed the definition of a starter home from 1,000 square feet to 2,200 square feet.

And some have done everything they were ‘supposed to do.’ They got a college degree and a steady job. They managed their credit properly or have repaired it after a few years of exuberance. They’ve even been saving for a down payment the last couple of years, but the down payment goalposts keep moving. Today, they are frustrated that they will never be able to build the kind of wealth their parents did through home ownership.

Cora, I can’t fix this any more than you can. In stark terms, the problem is that there just aren't enough entry-level homes to go around. And the numbers are shrinking. There is a severe housing shortage overall, but the supply of starter homes has been slashed by more than half over the past five years. There were a mere 300,000 starter homes on the entire U.S. market in September. The 72 million millennials make up more than a third of house hunters scouring the market right now. The dwindling supply is driving up prices and pushing the very few starter homes further out of reach. First-time buyers are looking for homes at the most competitive price point in the housing market.

It’s a new housing crisis that will continue keeping starter homes priced out of the reach of most first-time buyers until something is done to make the industry build millions of more houses (especially starter houses).

What’s your take on today’s housing crisis? Please comment.

Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].

Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years with articles listed on Yahoo Finance, Benzinga, and uRBN. Brian is a regular contributor at Realty Biz News
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