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- Starter homes are typically more affordable houses that are purchased by new home buyers.
- However, these entry-level homes are disappearing from the market as builders focus on more lucrative projects.
- Their absence has made it difficult for many first-time buyers to afford homeownership.
First-time homebuyers just can’t catch a break.
The massive government stimulus issued during the early stages of the pandemic combined with rock-bottom mortgage rates led to one of the most dramatic home-buying frenzies in US history. The buying boom pushed the nation’s home prices to historic highs and deepened its ongoing housing shortage and equality gap.
A crux in the housing crisis is the fact that homebuilders have not constructed enough affordable houses for them to purchase. Meanwhile, there are fewer existing homes available for sale. According to data from the US Census Bureau, in November 2022, not a single newly-built home sold in the US was under $200,000. The stark indicator only illustrates that starter homes are vanishing from the US real-estate market.
Starter homes are typically smaller, more affordable houses that are purchased by first-time buyers or those on a tight budget. These “entry-level” homes, as agents typically refer to them as, allowed buyers to build equity over time and then eventually trade-up to a nicer or newer home. But as builders focus on more profitable projects and existing homeowners refrain from listing their properties for sale, first-time buyers are finding that it is much more difficult to achieve homeownership.
New home inventory continues to climb
As home builders attempt to make up for years of underbuilding — a situation that was exacerbated during the pandemic as high demand, labor shortages, and supply chain constraints led to even lower levels of housing supply — much of their focus has been on constructing newer and more expensive homes, which now make up a higher share of available housing inventory.
According to data from title Insurance company First American, from 2000 until the beginning of the pandemic in 2020, on average, new homes made up 11% of total housing inventory. Today, that share has climbed to 29% as existing homeowners stay put and homebuilders increase their production of new home inventory.
“We want to make sure that those who want to become homeowners have a way to do so,” Odeta Kushi, the deputy chief economist at title insurance company First American, told Insider, “Having more starter homes available or homes priced at a lower price is really important for potential first-time home buyers.”
Data from real estate brokerage Redfin shows that the US median home price in November was $393,682. With higher home prices, mortgage rates and property taxes, as well as a possible recession looming in 2023 — that could trigger mass job losses — the odds are stacked against many would-be first-time buyers.
To ensure they also have a chance at homeownership, Glenn Kelman, the CEO of Redfin says that home prices in the United States need to decline.
“The only solution is for prices to fall,” Kelman told the Barron’s Live podcast on January 4, adding that the Fed is also paying close attention to home prices and affordability as an indicator of inflation. “We could see that as a calamity — I know that it affects homeowners, and I am one of them — but at the same time, we have to make room for the next generation to be able to buy a home.”