With rising rents and mortgages and a dearth of available houses, the average cost of homes across the U.S. has risen to $412,300 – up 28% from the second quarter of 2020 at the start of the pandemic. Though that crisis has passed, a new one in housing costs has taken over.
One of the housing categories that has seen the largest cost increase is starter homes.
In real estate terms, a starter home is defined as one being “the lowest third of home values in a region.” It is a home that is a sort of “stop-over” to help build equity while saving for a larger, long-term home. The average cost of purchasing a starter home nationwide is only $196,000, but this is an increase of 54.1% over the past five years. For some perspective, the typical U.S. home rose 49.1% in the same timeframe.
Million Dollar Starter Homes
According to Zillow.com, the average starter home costs $1 million in over 237 U.S. cities and large metro areas, far beyond the reach of most would-be first-time homebuyers. Yet many young people are going to these locations to find jobs.
Zillow used its lower-tier Zillow Home Value Index to come up with its list of cities. That data pool looks at the “bottom third of 'Zestimates'” (Zillow’s estimate of a home’s market value) and calculates the average.
Five years ago, only 85 cities made this list.
Out of the 237 cities, 117 are in California, followed by 31 in New York (most in Long Island), 21 in New Jersey, 11 in Florida, and 11 in Massachusetts. Metro areas with the most restrictive building regulations have the most $1 million starter homes.
What is Causing the Shift?
The increasing costs of a starter home can be attributed to several factors.
A Boomer downsizing trend, where “starter homes” are more in keeping with the square footage an aging population wants. This seems in contradiction to other reports that state boomers are staying in place as they don’t feel they can find what they want without incurring unnecessarily high costs. That said, when Boomers do find a smaller house to their liking, they snap it up, usually at a higher price than the average 35-year-old first-time homebuyer (a year older than the 2019 average age) can afford.
Many millennial and Gen Z buyers are purchasing homes with the intent of renting out a portion or all of them for income. This trend has affected the number of available homes in many markets as, in the past, Gen X and Boomers would sell their starter homes to move to their forever homes, creating inventory for younger buyers. By holding onto starter homes, younger buyers are (perhaps temporarily) increasing their value by lowering available inventory.
Corporations are investing in starter homes and fixer-uppers with the intent of improving them and reselling them at much higher prices or holding them in inventory to rent them as temporary housing through sites such as Air BNB and Vrbo, again decreasing available inventory.
Down Payments are Holding Buyers Back
With high interest rates and increasing home prices, many would-be buyers are having to put down much larger down payments in order to comfortably afford monthly mortgage costs (principal and interest, plus property taxes and insurance). Financial experts continue to advise that no more than 30% of income should go towards housing so there is enough of a budget buffer for emergencies and other important things. Based on average income figures in 2024, rather than the heretofore average 20% down payment, homebuyers need to save up to $127,750, or 30.9%, for a home.
This need for larger upfront funds is one of the major contributing factors to raising the average age of first-time homebuyers to 35. A person making the national median income would require 12 years to accumulate the $127,750 down payment needed to afford a mortgage on a typical U.S. home costing $412,300. Buyers in their mid-30s (the average age of first-time home buyers), however, are probably not looking at starter homes as much as homes where their young families can grow, in safe neighborhoods that are in good school districts.
Gift and Partnership Buying on the Rise
When you see young couples purchasing million-dollar homes and sending their children to private schools, you may wonder, “How can they afford to do that at their age?” The answer is gifts and partnerships.
Last year, 43% of homebuyers used a family gift for at least part of their down payment, or they partnered with family or friends to raise the needed funds. For many, this is the only way they can afford to have a home of their own in today’s market.
What About in Virginia
According to Business Insider, Virginia starter home buyers rank 12th out of 50 in terms of costs.
In 2019, the median starter home cost was $133,900. The median home value was $258,400, and the average worker earned $51,594 annually.
Today, the median starter home cost is $206,206. The median home value is $395,685 and the average worker makes $65,590.
The fact that incomes have only increased 21%, but starter home values have increased over 50% in Virginia, shows why the Commonwealth is ranked so high and why many homebuyers are relying on gifts, partnerships, and time in order to buy their first home.
Sources: Zillow, Money.com, Forbes, Apartment Therapy, Forbes
Very informative!