Are Starter Homes Making a Comeback?

Maybe. It's unclear whether Millennials will embrace modest starter houses the way generations of first-time home buyers did before them. But, chances are good they will.

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For decades, first-time home buyers have gravitated to the affordability and manageable maintenance of smaller properties. But in recent years, these “starter homes” have become harder to find. What’s caused this scarcity of the once ubiquitous starter home, and what does the future hold for them?

Starter Homes in Short Supply

In the lead-up to the 2008 housing crash, the market saw a distinct drop in the supply of starter homes. Builders chased the greater profit found in larger homes, and the easy mortgage market meant buyers could afford more square footage.

Post crash, many homes slipped into foreclosure, where they were eventually purchased by investors and held as rentals. Meanwhile, the first homeowners to return to the market were wealthier buyers, less affected by more stringent lending standards, and builders catered their offerings to that segment of the market.

This meant fewer starter homes were being built and less of the existing stock was for sale. The result? As reported by Zillow, the average value of starter homes has gone up 57 percent over the past five years.

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Growing Demand for Starter Homes

Currently in their mid-twenties to late thirties, Millennials are prime candidates for starter homes. But given student debt, wage stagnation and a bleak job market following the Great Recession, many Millennials postponed their dreams of buying a home and continued to rent. Remember all those homes snapped up by investors and converted to rentals? With plenty of renters, they have no incentive to sell their rental properties.

But the sheer numbers of Millennial buyers might force the market to change. According to Realtor.com, Millennials already own about 46 percent of all U.S. mortgages. And that number’s only going to expand, as over the next 10 years an additional 45 million Americans will enter the standard age range for first-time home buyers.

The Future of Starter Homes

The good news for buyers is that builders are producing more starter homes. According to the National Association of Home Builders, the average size of new homes has been shrinking since 2015. Still, the median new home is around 2,300 sq. ft., more than 10 percent larger than two decades ago.

It remains to be seen if builders, buyers and lenders can make the needed adjustments in time to meet the next wave of demand. But if they can, there’s evidence that we may see starter homes reemerge as a rite of passage in American home ownership.

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