Some 45 million Americans are expected to reach the typical first-time home buyer age in the next decade, which is a fresh 34 years old.
This is 7.4% more than the 41.8 million individuals currently aged 35-44, per a new analysis from Zillow.
In short, this means there’s the potential for even more demand than usual in the starter home market as those aged 24-33 transition from renting to owning.
But it also means you might want to skip the starter home completely and just go for the forever home, or at least a property you can keep for the long haul.
A Shortage of Starter Homes
- The lower-third of the market has appreciated 57.3% in the past five years
- While for-sale inventory has fallen 23.2% during that time
- With 45 million more potential buyers coming of age in the next decade
- It could get even more competitive and unaffordable
Over the past five years, so-called “starter homes” (those in the least expensive third of the market) gained 57.3% in value.
While that’s great news for those who purchased such homes back in 2013-2014, it’s terrible news for those still renting.
Another unfortunate truth is that many of the homes in this tier weren’t purchased by young couples with a dog that were planning to have a baby.
Instead, they were purchased by institutional investors and later turned into single-family rentals. So they’re effectively off the market, perhaps for decades to come if that nascent business remains fruitful.
Regardless of who bought these homes, it means there are a lot less of them for those looking to enter the real estate market in their mid-30s.
Indeed, inventory in the bottom third of the market has fallen 23.2% during the same time period, essentially creating a shortage or even a crisis for first-time buyers.
So what is a first-time buyer to do? It’s not like rents are getting any cheaper, what with the many renters that also exist.
Avoid the Competition, Buy the Move Up Home First
- While perhaps unconventional or seemingly too expensive
- It could make sense to look at the move-up homes first
- You might be able to skip the cost and headaches of two home purchases
- And find something you can grow into over time and never leave
One thing you could do, assuming you have the required income and assets, is skip the starter home phase altogether.
While some might scoff at the idea, it should be noted that homes in the middle third of the market appreciated just 36.8% over the past five years, while the most expensive third of homes rose only 26%.
So for starters, they haven’t seen nearly as much appreciation on a percentage basis as the starter homes.
Additionally, there’s a lot less competition for the middle-tier and most expensive homes. These ones actually sit on the market…
If you set your sights on a starter home, there’s a good chance there will be a bidding war or at least some healthy competition.
There’s also a high probability the seller is flipping the home, since these cheaper properties tend to be the perfect candidates for a quick flip.
Flippers know what type of property is most in demand, and it happens to be the lower-tier homes.
Aside from the competition, which will likely drive the price up even higher than it should be, there’s also the quality of the homes in question.
Homes that were recently purchased on the cheap and renovated are often aesthetically pleasing but what lurks beneath the surface?
The whole mid-century modern craze has made undesirable homes popular again, but does new paint and flooring change the fact that the pipes and electrical are nearly a century old?
Sure, some might go above and beyond and address all the issues, but take a moment to realize how old the property is.
Is the Starter Home Actually Cheaper?
- Competition and bidding wars can drive the price well above asking
- These types of homes may also require a lot of work (and expense)
- Low down payment mortgages are easy to come by these days
- So the more expensive home might not actually be out of reach
When all is said and done, you might wind up spending just as much on the starter home as you would have by just going up a tier.
The mid-priced homes might be listed for a bit more, but if there’s no bidding war, and even a price cut and seller concessions, you could get a better deal, especially if you don’t need to move again anytime soon.
There are plenty of low down payment mortgage programs available nowadays, even on more expensive homes, which require just 3% down or less.
A different Zillow analysis found that recent home buyers needed an additional 1.5 years to save for a down payment than they did 30 years ago.
But back then it was customary to put down 20% when buying a home. Today, not so much.
So if you believe down payment is an issue, it might not be once you explore financing options.
And when it comes to monthly payment, another $100,000 in mortgage only costs roughly $500 more per month thanks to the low mortgage rates available.
Ultimately, most folks want to move into a home they can actually keep for more than a few years.
It’s super cliché to buy the starter home, have a kid, then realize you need more space and list your property, complete with photos of the nursery. But it’s also an extremely expensive progression.
When you factor in the costs to buy and sell two homes, obtain two mortgages, move twice, etc., the starter home becomes even less appealing financially.
It’s also very stressful to move, especially at a time when you might be expecting a new member of the family.
When it comes down to it, purchasing a home should never be a rash decision – you should be looking for a keeper, not a “right now” home.
If you aren’t, you might question why it is you’re buying to begin with.
Pros of Buying a Starter Home
- It should be the cheaper option (stay within your budget)
- Easier to qualify for a mortgage (lower down payment needed)
- Less home means lower utility bills
- Won’t get in over your head and can allocate money elsewhere like retirement
- Can get accustomed to homeownership at your own pace
- Generally easier to sell if you have a change of heart
- Could rent it out and buy a new home if financially able
Cons of Buying a Starter Home
- Might not be that cheap if competition and scarcity drives up the final price
- Property may not be in a desirable location for the future (e.g. good school district)
- Are you buying for the right reasons or just to buy?
- Might need more TLC aka additional renovation costs
- Could quickly outgrow the home if you start or add to your family
- Will require a subsequent home purchase in the near future (lots of costs, moving, stress)
- Timing could be bad attempting to sell and/or relocate to a new move-up property
Read more: What Is a Good Price for a First-Time Home Buyer?