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Indeed, a Realtor.com report found that while starter homes — which it defines as all two-bedroom listings — seem unaffected by the current correction in the housing market, luxury homes have been feeling the full effects…
The price trajectory for luxury homes — which Realtor.com defines as the most expensive 10% of homes in any given market — however, went the opposite way.
Their prices “skyrocketed as the stock market surged and buyers sought more living space” during the pandemic: in the middle of 2021, there was a 40% year-over-year price increase for luxury homes but by the end of the year, the luxury market receded as recession fears increased. And in 2022, luxury homes have seen modest-to-stagnant price growth, around 2.5%, ending the year close to flat…
“If you think of luxury home purchases as discretionary, starter home purchases are almost the opposite,” Hale said in the report. “It’s more about timing and strategy.”
If starter homes are now more expensive due to demand and limited supply, does that make them more attractive to communities and developers to consider approving and building? One concern some communities have is that cheaper homes might devalue other homes in the community and/or bring different residents to a community. When they envision more affordable housing, they may have particular sets of people in mind.
American home buyers are older, whiter and wealthier than at any time in recent memory, with first-time buyers accounting for the smallest share of the market in 41 years, the National Association of Realtors found in its annual profile of home buyers and sellers.
White buyers accounted for 88 percent of home sales during the survey period, up from 82 percent during the same period a year earlier, reaching the highest level in 25 years, according to the association’s findings.
The new findings add weight to a hard truth that many young families have experienced as they struggle to save money to buy a home, competing in the most brutally competitive housing market in modern history: They have been elbowed out by buyers who have something they might never have — all cash…
“This is a feedback mechanism that can potentially supercharge wealth inequality in our economy,” said Austin Clemens, the director of economic measurement policy at the Washington Center for Equitable Growth, who studies housing inequities. “It’s hitting younger people, it’s hitting lower income people. And we also find that this is hitting Hispanic and Black households especially hard.”
Though loan denials for both Black and white applicants have slowed since the 2008 financial crisis, the gap in denial rates for Black and white people applying for home loans has widened significantly. Today, 15 percent of Black applicants are denied mortgages while 6 percent of white applicants are denied the home loans, according to a report by the National Association of Real Estate Brokers, an advocacy organization for Black real estate professionals.
The housing market remains persistently and disproportionately challenging for Black prospective home buyers, the report’s writers say, although Black homeownership has been inching forward since the passage of the 1968 Fair Housing Act, which made it illegal to discriminate based on race or religion in all aspects of home sales and rentals. The full report will be released on Wednesday.
Nearly 45 percent of Black households own their homes, compared with more than 74 percent of white households. But in 1970, the gap in homeownership between Black and white households was about 24 percent. Today, it is 30 percent.
The disparity in homeownership rates, as well as widespread appraisal discrimination, are compounding the massive income gap between Black and white households and thwarting Black Americans’ efforts to create generational wealth, the report notes. In 2020, the average white family held 12 times the wealth of the average Black family, and home equity is the largest source of wealth for both Black and white households, the report says.
If a potential buyer cannot purchase now, this has ramifications for years. And if someone could not purchase decades ago, this has implications right now.
Given the American emphasis on homeownership, even by presidents, I am a little surprised there has been limited public conversation about more assistance for first-time buyers. Are there ways on a broader scale to help people purchase a first home that helps increase equity later? With starter homes in low supply, help is needed. And addressing disparities now could help close gaps later.
In each of these places (that last one is Austin), modest entry-level housing has been replaced over time by far larger and more expensive homes out of reach of most first-time home buyers. Neighbors sometimes sneer at such new additions as “McMansions” (but note the regional variation in McMansion architecture). I often hear from readers and residents during my reporting that it’s a shame the developers who built them tore down “perfectly good houses.”
This has consequences:
There is nothing inherently bad about small 100-year-old houses getting replaced by larger, modern ones (indeed, many planners, historians and economists would say there is something bad about insisting that communities must remain exactly the same forever). Tastes change. Consumer demands and demographics shift. Americans, on average, have become wealthier over time, capable of affording more housing than the typical family could three generations ago.
But the reality is that most communities effectively ensure that the only viable replacement for a starter home on expensive land is a new home that’s much larger and more expensive. That stance contributes to the affordable housing crisis. If communities struggling with it want to rebuild the entry-level end of the housing market over time, that will almost certainly require allowing a new generation of starter homes that look more like duplexes or condos, or small homes on subdivided lots.
Over time, the number of smaller homes in desirable communities or neighborhoods dwindle as property owners and new buyers want homes that reflect more current trends. Another way to think about this: the supply of starter homes or smaller homes is reduced in particular places (if it is already not that affordable because of the demand in desirable places) and it is not necessarily being replaced nearby, if at all within a region.
It may be worth noting that this teardown pattern does not happen everywhere in cities and suburbs or even in most places. While I have not looked at the issue systematically in the Chicago region, the evidence I have seen is that teardowns are taking place in larger numbers only in certain locations.
The affordable end of the market has been squeezed from every side. Land costs have risen steeply in booming parts of the country. Construction materials and government fees have become more expensive. And communities nationwide are far more prescriptive today than decades ago about what housing should look like and how big it must be. Some ban vinyl siding. Others require two-car garages. Nearly all make it difficult to build the kind of home that could sell for $200,000 today…
Nationwide, the small detached house has all but vanished from new construction. Only about 8 percent of new single-family homes today are 1,400 square feet or less. In the 1940s, according to CoreLogic, nearly 70 percent of new houses were that small…
But the economics of the housing market — and the local rules that shape it — have dictated today that many small homes are replaced by McMansions, or that their moderate-income residents are replaced by wealthier ones. (A little 1948 Levittown house on Long Island, the prototypical postwar suburban starter home, now goes with a few updates for $550,000.)…
The costs – financial, regulatory – are too high for the construction of lots of starter homes. The proposed solution is to try to reduce those costs by placing multiple residents on one lot and/or increasing density in communities and developments.
I wonder if the best path forward is for certain communities to pursue starter homes successfully and show that it is possible. Of course, one danger is that even if it works well in some communities, other communities might leave the burden of such housing to a small number of communities. However, if starter homes can be constructed in such a way that they are perceived as an asset to the community and not a threat to property values, they might catch on. Are there several communities that would fit the bill?
Nearly 836,000 multifamily units are under construction, the most since 1973, according to Jay Parsons, chief economist at RealPage. But most new construction targets higher-income tenants and not the lower end, where supply shortages are most extreme, he said.
I have written about the dearth of starter homes and I would suspect a similar dynamic is at play here. Builders and developers can make more money on multifamily units with higher prices. If someone is going to go to all the effort for development and construction – and this can be quite a bit of effort in certain places – they would prefer to gain more financially in the end. The number of places that require the construction of affordable housing alongside market rate housing or seriously pursue cheaper housing are limited.
If these higher-income units come on line, it will add to a bifurcated housing market where those with enough resources have plenty of choices and those with fewer resources have limited and possibly unpleasant options.
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 single-family homes were smaller than 2,400 square feet while in 2020, that share had fallen to 57%.
These are two very important factors for getting into purchasing a home. A lower price means a smaller down payment and mortgage is needed. Smaller homes are cheaper because they have fewer square feet and cost less to construct.
And without this ability to enter the housing market, it will take potential homebuyers longer to enter, if they can enter at all. This precludes them from building housing equity and stepping up to larger or more expensive residences in the future. It limits the ability of people to pursue homeownership, a goal many Americans have.
Tackling both price and housing size will be difficult in many markets where developers, builders, and those in the real estate industry can get more. Yet, here is an opportunity to appeal to an important sector of potential homeowners if solutions can be put into practice.
Daryl Fairweather: We are not building enough housing for everybody who needs a place to live. We built fewer homes in the 2010s than in any decade going back to the 1960s, and at the same time millennials are the biggest generation and they’re entering into home-buying age. Millennials aren’t living in their parents’ basement any more or shacking up with roommates, they want a place of their own, and we didn’t build any housing for them in the last decade because we are still so traumatized by the last housing crisis. We didn’t put any investment into housing…
Daryl Fairweather: The government has estimated that we are short about 4 million homes in this country, and that number is likely growing, especially since the pandemic.
In my opinion, the emphasis in the rest of the segment on institutional buyers is a weird way to go given the numbers cited above. If we need over 4 million housing units, it seems like more of this falls on developers, builders, and communities to open up opportunities for new housing for millennials and others who really want it.
I wonder how much of this now works like it seems to in the auto industry. Auto makers have shifted to making trucks and SUVs because there is demand and a higher profit margin. These vehicles are not greener but there is a lot of money to be made. Is the same true of starter homes? Smaller units simply do not bring in as much money as a larger house with more amenities. And, if builders and developers have to go through a significant process to purchase land, get approval, and go through construction, wouldn’t they want more money at the end?
I think we should ask about the civic responsibility of those who can approve homes and/or build homes. Don’t we need more housing? Shouldn’t this be a shared responsibility across actors? Why are so many Americans willing to get into their particular housing unit and then shut the door to those who want a similar opportunity?
Earlier this year, Realtor.com estimated the gap between the number of homes needed and the number of homes available at 5.24 million. That estimate in June represented an increase of 1.4 million above the estimated 3.84 million gap in 2019, primarily because residential construction hasn’t kept up with household formations.
From January 2012 to June 2021, 12.3 million new American households were formed, but just 7 million new single-family houses were built, according to Realtor.com.
The housing shortage is particularly acute in the more-affordable range. Newly built houses with a median sales price of $300,000 represented just 32 percent of builder sales in the first half of 2021, compared with 43 percent during the first half of 2018, according to Realtor.com. To close the gap between demand and supply, builders would need to double their pace of construction for five or six years, Realtor.com economists estimate.
I have been trying to keep track of this for several years now: where are the new cheaper homes? If home builders are interested in selling homes, why not also create products for this part of the market?
There could be lots of reasons for this present state. But, this is not just a problem of 2021; this has been going on for at least a few years. Who can or will act to address this? Is this a pressing social concern that requires attention or just something to note every so often?
Imagine a time in the near future after this trend of the last ten years or so has truly piled up. How will younger adults pursue homeownership, a goal many Americans still say is desirable? Will a lower end of the housing market simply disappear to be overshadowed by more expensive, larger homes that truly generate profits?
If this continues, I would not be surprised to see more calls for housing interventions beyond the market.
The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low, and data on new construction from the National Association of Home Builders shows that single-family homes are significantly bigger than they were years ago.
Homeowners from previous generations had access to smaller homes at the start of their financial lives. In the late 1970s, an average of 418,000 new units of entry-level housing were built each year, according to data from Freddie Mac. By the 2010s, that number had fallen to 55,000 new units a year. For 2020, an estimated 65,000 new entry-level homes were completed…
“What was really striking to me was the consistency in the decline in the share of entry-level homes, irrespective of geography,” Mr. Khater said. “The thing that struck me the most was that really, it’s all endemic. It’s all over the U.S. It doesn’t matter where.”…
Homeownership leads to greater wealth for those who buy earlier. An analysis from the Urban Institute estimates that those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s. Meanwhile, those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.
Three things stand out to me from this article:
The decline in the construction of these smaller homes is real. The numbers cited above suggest roughly 15% of these smaller homes are constructed now compared to the late 1970s.
At the same time, the definition of an entry-level homes is contingent on square footage. These days, 1,400 square feet is not that large for a home. These standards have changed over the decades; new homes in the 1950s in Levittown were more around 1,000 square feet while many new homes today are over 2,500 square feet. As builders construct larger homes (presumably making more money) and some buyers want larger homes, what is now an entry-level home may have changed.
The first rung on the homeownership ladder has long been an affordable “starter home.” These houses, with their smaller footprints and selling prices, allowed young homeowners to build wealth and upsize as they started their families…
Supply of “entry-level housing”—which Freddie Mac defines as homes under 1,400 square feet—is at a five-decade low.
Surging prices and stiff competition mean there aren’t enough smaller, more affordable starter homes to go around in many regions. The pandemic and subsequent recession, along with the student debt crisis and delayed family formation, contributed to frustration and despair among younger house hunters…
Lately, data from the National Association of Home Builders shows new construction is again giving priority to higher square footage for single-family homes, a trend likely spurred by the widespread shift to working from home and house hunters’ need for more space.
I wonder about the role of local governments. How many urban neighborhoods and suburban communities allow for or encourage the construction of smaller homes. It might take some extra work for a community to work with a developer who is willing to construct smaller and cheaper homes. At the same time, some of the existing members of the community might not be happy about the change as smaller homes are often interpreted as dragging down values and the character of the community. At the least, wealthier communities are unlikely to encourage such homes unless they are at a higher price point – and then it is no longer a starter home.
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