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Making the Case for Building More Starter Homes

Starter Home Supply Falls

Many builders are shying away from starter homes, thanks to a variety of factors that make them less profitable. Still, high demand for these properties makes them a sound investment in certain instances. Keep reading to determine if you should consider building more starter homes.

Plummeting Inventory

According to Trulia’s Inventory and Price Watch, available properties for first-time homebuyers dipped 12.1 percent in 2016. That figure represents the steepest year-over-year decrease in three years. Right now, there are just over 290,000 starter homes in the United States, and this figure represents just under a quarter of the total number of homes.

Limited availability has also pushed starter home prices upward. With a median list price of around $164,000, the average first-time buyer must shell out 38.5 percent of their total income on housing – up 1.9 percentage points from the same period the year before. This is less than ideal for most buyers, since lenders usually require home payments to be less than 36 percent of a buyer’s total income.

Starter homes have become increasingly unaffordable in a few popular markets, including Tacoma, San Diego, San Francisco, Sacramento, Portland, Miami, Los Angeles and Denver. In fact, each of these cities experienced at least a 5-percent jump in the share of income required to purchase a starter home in 2016 versus 2015.

Based on the housing stock from the fourth quarter of 2016 in the country’s 100 biggest metro areas, Trulia’s report appears to paint a grim picture for first-time buyers. While America is experiencing a housing shortage at all income levels, starter homes are especially scarce, leaving many first-time buyers sitting on the sidelines despite an apparent will to buy.

Why Aren’t Builders Making More Starter Homes?

Despite the large demand for starter homes, many home builders are reluctant to build them. This is due to a number of reasons, including:

• High land costs: According to BUILDER Online, during the first part of the housing recovery, many lots have been  of “A” quality, with very little attention devoted to B, C, and D lots more geared toward entry-level properties. To change this trend, experts say land costs will need to come down.
• High fees: In entry-level communities, builders often face expanded support service and high infrastructure costs. In turn, these expenses often end up adding an extra 20 to 25 percent price to the cost of a new home.
• Shifting interest: Modern buyers are waiting longer to marry, pay down student debt and amass their abilities to repay debt. This has created a new profile for first-time buyers, who aren’t necessarily willing to settle for basic homes that get them out of monthly rental payments.

Is There a Good Reason to Build Starter Homes?

There are a number of reasons why today’s builders have shied away from starter homes. At the same time, a new generation of home buyers may lead some builders to reassess their views.

Thanks to rising rent costs, more and more Millennials are choosing to put money toward a home payment to build equity. According to a survey from TD Bank, nearly two-thirds of Millennials are making plans to buy a home within the next two years. This should create a profitable influx of first-time buyers, since young adults between the ages of 18 and 36 represent the largest population group today. Still, because Millennial buyers appear to be most active in the Midwest, builders will need to evaluate the profitability of building starter homes based on their specific region of the country.

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