Time was when first-time homebuyers could pursue the American Dream by purchasing a small, simple house that allowed them to build wealth. Today, those “starter homes” are hard to find, and the ones that are out there often cost far more than a first-time buyer can afford. What happened? Here’s what you need to know about searching for a starter home.
What is a starter home?
Definitions vary, but Fannie Mae considers a starter home one with 1,400 square feet or less. Traditional starter homes typically have two bedrooms, one or two baths, and fewer amenities than more permanent homes.
Today, only about 8 percent of new houses meet the starter home size definition. In the early 80s, around 40 percent of new construction constituted starter homes, while in the 1940s, nearly 70 percent of homes built were 1,400 square feet or less. Today’s “smaller” homes are more than 2,000 square feet, even though the average number of people in an American household has dropped.
Why aren’t builders constructing starter homes?
Traditional starter homes are disappearing because builders say they can no longer make a profit from them. The price of land has risen sharply, particularly in areas with significant numbers of jobs. The cost of building materials and labor has also increased significantly. Builders now pay more to the government to build as they are required to cover an increasingly large percentage of the cost of necessary infrastructure. And government regulations often now require builders to use particular materials or comply with design specifications that add to the construction cost. All of these factors combine to make it difficult for builders to build a $200,000 house and make a profit.
Even existing starter homes have become out of reach for many first-time buyers as the cost of the land on which those houses sit has gone up. And investors who can pay cash are snapping up these houses just as demand for them grows because of downsizing empty nesters and young adults without kids who want smaller homes. By early 2022, investors made 28 percent of single-family home purchases. Since then, the number of investor purchases has dropped, but it remains higher than in the past.
How to find that first home
With market forces working against first-time buyers, the search for a home will remain difficult. To find an affordable first home, consider settling for a place that’s smaller than you want or one in a less desirable neighborhood or that needs significant work. And remember: Your starter home is not your last house. Building equity now, even in a less desirable house, will make it more possible to buy the home of your dreams down the road.
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