ARE STARTER HOMES BECOMING EXTINCT?
As prices soar, buyers frustrated in hunt for affordable roost
There were smiles aplenty at the ribbon-cutting event at the Village Gardens in Seattle. h The occasion? To celebrate the completion of 16 new modern-looking starter townhomes not too far from Jimi Hendrix Park in the city’s Central District neighborhood.
About eight homes will be available to households who make less than 80% of the area’s median income and two will be for those considered homeless or who had financial problems keeping a home.
“We got super frustrated by those who didn’t believe us, that there is a lack of homes for middle-median income folks,” said Kathleen Hosfeld, executive director of Homestead Community Land Trust, the organization that worked with the city to build the affordable housing. “This is not just a Seattle problem, this is happening nationwide.”
Seattle’s effort comes at a time when the U.S. is having a major affordable housing crisis, especially for those first-time homebuyers looking to purchase a home ranging from 1,800 to 2,400-square-feet, the typical size of a starter home, according to experts.
It begs the question: Are starter- or entry-level homes on the verge of extinction?
“They’re not extinct, but they are endangered,” said Robert Dietz, chief economist for the National Association of Home Builders. “It’s much harder to find and build homes in smaller quantities in today’s market given the demand, space challenges, and potential regulatory burdens. The submarket that’s been least supplied has been the entry-level home.”
Homes ranging in price from $100,000 to $250,000, the typical cost for an entry-level home, have seen nearly a 28% decrease in inventory from a year ago, says the National Association of Realtors.
And smaller homes are also in short supply. In 1999, 37% of newly-built single-family homes were smaller than 1,800 square feet. By 2020, that share had fallen to 25%, Dietz said.
In comparison, in 1999, 66% of newly-built singlefamily homes were smaller than 2,400 square feet while in 2020, that share had fallen to 57%.
The big demand and a small supply of homes are also leading to fewer prospective buyers, said Rose Quint, the National Association of Home Builders’ assistant vice president for survey research. At its pandemic peak last spring, 61% of prospective buyers were “actively trying” to find a home to buy, Quint said.
“Now, the share is back to pre-pandemic levels, at 46%,” Quint said in a recent post. “This is clear evidence that higher mortgage rates and double-digit growth in home prices are discouraging a growing share of buyers from engaging in the purchase process.”
And it’s happening all across the U.S., Quint said. The share of active buyers in the Northeast region fell from 72% to 50%, in the Midwest, from 51% to 40%, in the South, from 58% to 48%, and in the West, from 72% to 46% during the last year.
Home prices increased nearly 20% in major cities across the country in February, according to the latest S&P Corelogic Case-shiller national home price index and National Association of Home Builders research found the cost of building materials has increased 33% since the start of the pandemic.
And as the average 30-year mortgage rate hovers at 5%, the highest in a decade, the U.S. is also experiencing its highest inflation rate in 40 years, a combination that is also discouraging buyers, Quint told USA TODAY.
“Affordability is going to be an issue in this country for the foreseeable future,” Quint said.
Many are now spending three months or longer trying to buy a home before giving up, Quint said. About 48% said their inability to find an affordable home was the number one reason they quit looking. The next highest reason was the inability to find a desirable neighborhood (34%), followed by the inability to find a home with desirable features (31%), and being outbid by other buyers (29%).
Quint said she expects the outbidding percentage to fall to the low 20s as fewer people make offers, but the competition is still a turnoff to potential buyers.
Sarah Gullotti of Riverside, California, can relate. She and her husband Brandon made at least 20 offers on homes during the pandemic as they craved more space for their growing family.
But they kept coming up short, often due to sellers taking all-cash offers, among the hottest trends in a hot housing market.
“We just weren’t getting anywhere and were finding it very frustrating as homes were selling fast,” Gullotti said.
About a year ago, Gullotti saw a social media post for Flyhomes, a startup “power buyer” that helps qualified buyers get their new house by providing all-cash offers to sellers. Currently, all-cash purchases comprise 33% of home sales, compared to about 19% at this time two years ago, the National Association of Realtors reported.
Skeptical, Gullotti showed the post to her husband who was also suspicious.
But the couple was intrigued enough to part with their traditional real estate agent and try Flyhomes. After seeing a few houses the couple bought their current home last March for around $474,000 with the help of the startup.
“Now, the share is back to pre-pandemic levels, at 46%.
... Affordability is going to be an issue in this country for the foreseeable future.”
Rose Quint
National Association of Home Builders’ assistant vice president for survey research