Starter Homes ‘Scarcer, Pricier, Smaller, Older,’ Needing TLC
In addition to facing dwindling supply and escalating home prices, starter home buyers must also contend with homes on the market that are smaller and lower quality than they were in previous years, said Trulia, San Francisco.
“This spring home-buying season first-time home buyers may feel as if their American Dream might be a nightmare,” said Trulia Senior Economist Cheryl Young. “Starter homes have become scarcer, pricier, smaller, older and more likely in need of some TLC than they were six years ago.”
The housing market’s struggle with housing inventory is well-documented going as the spring buying season kicks in. In a report (https://www.trulia.com/blog/trends/inventory-q118/), Trulia said the starter-home market bears the brunt of price and inventory woes.
“Across the board, homes are the least affordable than they have ever been,” the report said. “Starter homes, however, have borne the brunt of the rise in home prices and decreases in inventory. These homes have seen a 9.6% increase in prices since this time last year and starter inventory hit a new bottom this quarter.”
Young, who authored the report, noted while housing inventory is up 3.3%, the first time it has hit positive territory since this same period in 2015, starter home inventory has plummeted 14.2% in the first quarter.
“Homes are increasingly unaffordable,” Young said. “The share of income needed to purchase a home across starter, trade-up and premium segments reached new highs, largely due to increases in mortgage rates since the start of 2018. The portion of income needed to buy a starter home surged up 4.2 percentage points since this time last year, up to 41.2%–well above the 30% maximum experts recommend.”
In addition to facing dwindling supply and escalating home prices, Young said, starter home buyers must also contend with homes on the market that are smaller and lower quality than they were six years go.
“The rise of fixer-uppers among available starter home inventory points to a particularly alarming trend of decreasing quality and hidden costs,” Young said. “Fixer-uppers represent–along with the age of homes–lower quality homes. So even while starter home prices have appreciated nearly 60% since 2012, prospective homebuyers are getting far less for their money. In fact, a fixer-upper might even be a trade-up home in disguise; the price of repairs along with potential rental payments while a fixer-upper is being upgraded could push the true cost of the home into the trade-up segment. Increased competition and high prices also means that sellers have little incentive to upgrade properties before listing them.”
The report said least-affordable markets are concentrated in California and Boston. In some of the most expensive places in the country such as San Francisco, San Jose and Los Angeles, those income earners at the bottom third of the market would need to spend all their income and more (more than 100%) to afford a median starter home. The starter home price among all ten of these markets has also increased since this time last year.
“Starter home buyers are facing a perfect storm of the lowest inventory, the highest prices and the lowest levels of affordability among all housing segments,” Young said. “In addition, the quality and size of homes available in this segment has worsened to the point where first-time home buyers are likely to feel their choices are even more limited. Meanwhile, mortgage rates have been climbing since the beginning of 2018, worsening affordability. While 2017’s housing starts reflected the highest numbers we have seen in 10 years, they have yet to translate to any relief in the starter home segment.”
