Where Have All The starter Homes Gone?

May 13, 2016

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 andapartment 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.

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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 haveupdated 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.