Where Have All the Starter Homes Gone?

First-time homebuyers should manage expectations to find a home with the entry-level price they’re hoping for.

U.S. News & World Report

Where Have All the Starter Homes Gone?

Small houses(Getty Images)

The current state of housing markets across the country may have first-time homebuyers wondering if the concept of a starter home is the stuff of legends, or if someone, somewhere is getting a great deal on their first house.

With low housing inventory and new construction focused on luxury condominium and apartment buildings, homes that would have once been considered entry level – those on the lower end of price range, typically most affordable for buyers entering the market for the first time – may now exceed starter home prices.

While high demand is driving home prices out of budget for many first-time homebuyers, it’s not the only factor leading to an apparent lack of entry-level housing. In many cases there are homes available, but they are maybe a little too “starter” than most homebuyers today are willing to accept.

“Buyers today, as much as they say, ‘I want a starter home,’ they want the second one up,” says Gina Giampietro, a Realtor for Re/Max Select Realty in the Pittsburgh area.

Traditionally, a starter home requires some elbow grease to make it a comfortable place to call home, and homeowners stay for just a few years while they build their savings to buy a larger home to live in for longer. With increased expectations for homes to have updated kitchens and bathrooms and ample space, look move-in ready and be in a desirable location, it’s often not realistic that a buyer’s wish list will keep them in an entry-level price range.

But heightened expectations aren’t the only thing leading homeowners to feel an entry-level home is now out of reach. Less construction at the lower end of the market has left fewer options for first-time buyers, as construction remains focused on luxury apartment buildings. In 2015, 75 percent of new apartment developments in the U.S. were geared toward the high-end market, according to apartment listing website RENTCafé. And while a condo or townhouse has been traditionally considered a good first home, there is also a lack of inventory there.

In Denver, one of the country's hottest housing markets, there aren’t even new luxury condos to help ease the demand. Colorado's capital is seeing a significant population increase – growing by more than 5 percent from net migration alone between 2010 and 2014 – with people relocating there for job opportunities and aspirations of living near the Rocky Mountains. But a state law passed in 2005 that allows as few as two condo owners to bring a class action lawsuit against a builder has created obstacles for many condominium developers.

While the law is geared toward eliminating poorly built communities, it has made it easy to file lawsuits against builders and developers to the point they became overwhelmed, explains Kristal Kraft, vice president and broker associate at real estate brokerage The Berkshire Group in Denver. As a result, developers have almost entirely gotten out of the business of building condos, she says.

“The builders said, ‘We’re not going to build anymore,’ and they stopped building condos. It’s had a huge effect not just on our industry, but the affordability for first-time homebuyers,” Kraft says. While municipalities are passing their own legislation to encourage development of new condos and fulfill housing demand, she says it will likely be another couple years "before they're able to start building enough to satisfy the need."

Homes at starter prices are often still available, though what an entry-level price is varies by the market. While the Orlando, Florida, area establishes $200,000 and below as its entry-level price range, according to the Orlando Regional Realtors Association, Kraft says it’s hard to break into the Denver market within city limits for less than $400,000.

To find a home on the lower end, it may take widening your horizons and using a little creativity, but buying a starter home is still possible. While you begin your search for your first home, keep these details in mind so that entry-level price range remains in your sights.

Manage your expectations. A common misconception first-time homebuyers have is that they can find everything they want in a home at a low price. While finding a home that fits all your specific needs and requires no work can be impossible even in optimal buying conditions, heightened competition for homes in cities across the country and fewer homes are on the market means you'll likely have to cancel out a few items on that must-have list.

“They’re surprised about what $200,000 will buy in the market, and so to me it’s a matter of education and educating the buyer as to what they can expect beforehand,” says Lisa Ford, a Realtor at Charles Rutenberg Realty and secretary of the Orlando Regional Realtor Association.

Ford says the first hurdle is getting buyers into a home within their price range, which, depending on how much financing they’re approved for, may or may not keep them out of the market. The next step is tapering expectations to an option that fits in the buyer's price range.

Many buyers go into the house-hunting process expecting everything on their list is within their price range. But Ford stresses four bedrooms and a pool for below $200,000 isn’t going to appear often – if ever.

“The next home can have that fourth bedroom and the pool, but it’s tough to start from there,” she says.

Get ready to roll up your sleeves. A starter home in the classic sense is going to require work, but Ford says it’s important for first-time homebuyers to avoid taking on more than they can reasonably handle or afford. She says traditional financing often can’t cover the cost of major repairs that would make a fixer upper livable.

“It’s better to have a home that the major components are in good shape, but you have to take down the wallpaper or change out the kitchen – which in time, you could do, because it’s habitable,” Ford says.

Similarly, taking on a home that may be fine inside but lacking in curb appeal offers a more reasonable form of a fixer upper. Kraft recalls a recent deal she was a part of where the home had overgrown vegetation, which caused many potential buyers to pass.

“I just sold a house where it was just kind of ugly. They had hedges that were overgrown around the perimeter of the property, and it was just nasty. And that’s a lot of backbreaking work, but the buyer is in the process of removing those,” Kraft says.

Consider holding off for a while. The first home you buy doesn’t have to be a starter home in the traditional sense. If you’re having trouble settling for a home that doesn’t fit your expectations, there’s no rule saying you have to buy at a certain point.

Particularly with home values rising across the country, in many cases it may be economical to rent rather than buy until better options are available or you're in a position to purchase a nicer home. Giampietro says expenses outside of monthly mortgage payments, such as home maintenance and property taxes, can easily lead to a higher cost of living than renting an apartment.

“When the [cost of] ownership is higher than the rent because of the taxes, why should they buy?” Giampietro says.

Look at how much your cost of living is as a renter, then add up the costs that will come with being a homeowner – including monthly mortgage rates, property taxes, utilities and maintenance. If the total cost of being a homeowner outweighs your rental situation, you’re in a better place staying where you’re at until the market balances out more.

There’s no harm in deciding to hold off on buying a home until you like the options better, or you’re financially in a better place to buy the kind of home you would enjoy.

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