Real Estate

Starter homes may be making a comeback

Tight supply, rising home prices spur builders to create more affordable homes

A survey by the National Association of Homebuilders this fall revealed that 80% of American households now believe the nation is suffering from a housing affordability crisis. 

Even more recent, a report last week by the National Association of Realtors revealed that more than 30% of first-time homebuyers used down payment help from family and friends.

Across the housing industry, experts are pointing to new inventory concerns. Economic research consultancy Capital Economics echoed these sentiments in its latest report.

“With volumes low, builders have concentrated on more expensive, higher-margin homes,” the report stated. “By the end of 2017, just 40% of new homes sold for under $300,000. That compares to a share of around 65% in early 2007, when overall house prices were only 7% lower.”

But change may be on the horizon. Economists at Capital Economics are anticipating a rise in new homes sold for under $300,000, from under 50% currently to about 55% by the end of 2020. According to the report, this would boost overall housing starts to 950,000 annualized.

“Tight supply of affordable homes, and a relatively large increase in their price, are encouraging builders back to the starter home sector,” the report said.

However, the report goes on to add, “a slowing economy and tighter credit conditions rule out a substantial shift to cheaper homes.”

For first-time homebuyers, this would be a welcome change. As Millennials continue to enter the housing market and Gen Z joins as well, the lack of affordable homes has been a strain on their homebuying prospects. With both generations battling an unprecedented amount of student loan debt, a comeback in starter homes would create a better chance at homeownership. 

“Admittedly, credit conditions have seen some mild tightening over the past year,” the report states. “But they are a lot more favorable compared to the post-crisis environment. Furthermore, tight supply conditions have led to relatively larger price gains for cheaper homes.”

Of course, a cheaper home could mean sacrificing some square footage.  

“Indeed, new homes have been getting smaller,” Capital Economics reported. “At 2,245 sq.ft. in the second quarter, median floor space for new SF homes was at its lowest since early 2011. Admittedly, smaller homes can be built in costly areas. But the share of new homes sold for under $300,000 hit a three-year high in September. 

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