Why are fewer builders constructing smaller starter homes that first came to prominence after World War II?

It’s several things. Land is too expensive to put the more modest house on it. Municipalities’ fees are another reason. And then there’s this phenomenon: Entry-level buyers just don’t want a starter home — they want something fancier…

From the time that high-production builders gained traction in the ’40s and ’50s and into the last part of the last decade, they were able to access inexpensive land and get labor and materials in ways that allowed them to produce an accessible and affordable entry-level home. But the Great Recession didn’t cause land to decline in value the way that houses did, and the lots aren’t widely available. When they are available, there are multiple bidders for them, which pushes the price up. Builders also downsized during the recession, and they don’t have the same capacity to build in volume that they once had. Today, if you’re building a $300,000 or $400,000 house, you’re going to make more money than if you were building two or three $150,000 houses.

Some of the sticker shock for buyers of entry-level homes comes from the local entitlement and permit fees that effectively ward off entry-level neighborhoods from established communities. These fees get baked into the cost and may add 20 to 25 percent to the cost of the home, for schools, infrastructure and support services. Municipalities seem to be doing everything they can to prevent lower-cost housing from being developed. They want property values and, in turn, property taxes, to be higher…

The startup of household formations is lagging the generation earlier by a few years. They’re becoming couples later and having children later. In some seismic way, we’re seeing that age group that we call the millennials buying their first homes at age 35, 36, 37. Because that generation grew up in what are really the nicest homes that ever existed in any society, they’re not going to want to go back to a very modest first home that will set them back, in terms of what they’re used to. They have a whole different mindset about that than we did. Certainly, some percentage of this group is going to want (the simple starter), but most will want what they’ve become used to — even in student housing, it’s like major apartment amenities. “Modest” is not what they have in mind.

It sounds like there are issues on both the supply and demand sides:

1. Consumers now expect more from their first homes. With demographic shifts (later marriage and kids) plus higher standards of living over time, homebuyers want more. This is something that also works against downsizing arguments: once people have a standard (and in this case, it comes from their earlier years and not even from something they have owned yet), it is hard to step back from those features.

2. Builders just can’t make as much money off of starter homes. Land is more valuable – think of all those suburbs that have expanded in recent decades – and fees have gone up so they need to construct more expensive homes to make up the difference. How many established communities, particularly wealthier ones, want cheaper starter homes constructed which might lower their own housing values as well as contribute more children to the school system and possibly require more funding?

A few side effects that might emerge:

1. Those who do want starter homes will likely have to go to less wealthy and older communities with older housing stocks.

2. This might limit particular groups, such as lower-income workers, from buying a home as they will have a harder time making the leap to a more expensive new home.

3. This could keep rental prices higher if people have to save larger amounts for more expensive first homes.

4. Those same communities that want to protect their housing values may find they have precious few places for people they might want in the community – such as recent college graduates or downsizing older adults – to own homes.