These figures all point to softer demand for starter homes. In the aftermath of the housing crisis, people no longer universally see houses as the stable investment they once were; they are more aware of the risks of owning a home that does not always increase in value. This includes homeowners who were directly hit by the crisis a decade ago, as well as many millennials who witnessed the damage. The prospect of being underwater or trapped in a starter home following another downturn is a real concern. As a result, it appears that many prefer the security of only buying a house if they are prepared to live there for many years, alternatively choosing the flexibility of renting in the short term to avoid this risk or staying at home with their parents to save money for a better home, contributing to the elevated number of renter households and young adults living at home. This perspective and new housing liquidity preference puts a damper on demand for traditional entry- level homes. This dovetails with a recent Trulia report that suggests demand for starter homes is declining in a number of U.S. metros. Trulia divides housing stock into three different segments: starter homes, trade-up homes, and premium homes. In the report, they note that in 20 of the 74 metros where starter home inventory has fallen, prices have also fallen. This is counterintuitive to the national narrative on low housing inventory, where tight inventory levels are sparking substantial price gains as competition intensifies among buyers, and instead suggests that significantly lower demand for starter homes is cutting prices in certain metros despite falling inventory for the segment. In the same report, Trulia also provides insight on a national level by evaluating the 100 largest metros in the country. In the second quarter of 2016, the median list price for U.S. starter homes rose 6.4 percent year-over-year after facing the pressure of a 12.3 percent annual decline in inventory. Over the same time, premium homes saw a larger 7.9 percent price increase, but inventory levels were nearly flat. While the inventory reduction for starter homes is still spurring price gains, this discrepancy suggests comparatively weaker demand for the segment than for premium homes, again aligning with the Bank of America results that point to buyers’ preference toward skipping starter homes.
The outlook for traditional starter homes is clouded. Recent reports suggest that increased costs for building starter homes, resulting in part from rising regulation and associated fees, are squeezing profitability and steering homebuilders away from starter homes. The size of new homes continues to rise across the country , reflecting both the higher standards sought by homebuyers and where homebuilders’ greater profit margins are found.
Median square feet of new single-family houses in the U.S.
Source: Census Bureau, The Wall Street Journal
The growing disincentive for homebuilders to focus on this starter segment will undoubtedly hurt inventory and further deteriorate affordability prospects for potential homeowners. While low inventory is still meeting solid housing demand across the country, including starter homes to some extent, underlying demand for starter homes may be softening, and the size of this market may decline as buyers and builders alike show an increasing disaffection to it. The desire to ultimately own a home may be alive and well, but it seems that a number of first-time buyers may be willing to wait it out for something more than a traditional entry-level home.
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