There has been a lot of talk lately about an affordability crisis in housing. In big cities like Los Angeles, Miami, San Francisco, and Seattle, the rising cost of real estate and a sharp increase in rents is threatening to put even middle-class workers out on the street.
For newcomers to the market, including many recent college graduates, the housing crisis is even worse. Even those who earn a solid income often find that living within a reasonable commuting distance is difficult.
One factor that is often not addressed, and unappreciated is the relative dearth of starter homes in many parts of the country. In past generations, builders created entire tracts of modesty sized homes, all designed to appeal to first-time homebuyers, recent retirees, and others who needed an affordable place to live.
These days starter homes have become far rarer, and that short supply has driven up prices in other parts of the market as well. So what is behind the shortage of starter homes, and what can be done to restore balance and sanity for the first-time buyer? Here are some of the factors behind the decline in starter homes and some possible solutions to the current affordability crisis.
Generational Trends
Every new generation has created ripples in the housing market, and the current climate is no different. In past generations, waves of returning soldiers were met with an enormous supply of affordable homes. These modest homes were perfect for the former G.I.s, designed with modest floor plans but still providing room to grow.
Subsequent generations had their own unique impacts on the housing market, and the supply of affordable starter homes ebbed and flowed along with emerging trends in the market. As the baby boomers retired and moved out of their somewhat larger homes, the flood of new properties was less suitable for first-time buyers.
At the same time, builders were increasingly constructing larger homes, driven in part by the rising cost of land. Builders found that they could get more bang for their buck, and greater investment on their land costs, by building larger and more expensive homes. As a result, the supply of new starter homes declined, leading eventually to the affordability crisis buyers are struggling with today.
The Bigger is Better Mentality
The rise of larger and more stately homes was driven in part by builders and the higher cost of land, but without willing buyers, that new inventory would have gone unsold. Instead, buyers, including many first-time homeowners, rushed to purchase those behemoths, leading to a bigger is better mentality throughout the housing market and society as a whole.
This bigger is better mentality continued unabated, but it was brought to a screeching halt by the Great Recession and the housing crisis that precipitated it. First-time buyers who had stretched their budgets to purchase those huge homes found themselves underwater, and many would-be buyers learned an important lesson.
Investment Opportunities
Even in the depth of the Great Recession, there were still starter homes available. What was missing was a supply of eligible buyers, as lenders tightened their standards and mortgage brokers licked their wounds.
Banks that had been willing to lend money to almost anyone clamped down hard, leaving many buyers who would have previously qualified for mortgages holding the bag. At the same time, the huge supply of unsold properties, including bargain-basement foreclosures, attracted a whole new wave of buyers.
Those new buyers were real estate investors, some individuals and some representatives of large and well-established firms. And since they often offered cash, the relative tightness of the mortgage market was not a concern.
Many of those investors focused on the most affordable parts of the housing market, swooping in to purchase what would otherwise have been suitable starter homes for first-time buyers. And as the housing market shifted yet again, many of those affordable homes remained off the market.
Rising Rents
One of the reasons so many starter homes remained off the market is that these properties were extremely profitable for their current owners. As more and more first-time buyers and new college graduates were priced out of the housing market, demand for rental properties skyrocketed. As a result, rents began to rise, especially in hot job markets like San Francisco and Seattle.
This increase in rents hit young people especially hard, providing a double whammy of a newly unaffordable housing market and difficulty paying rent. At the same time, devoting so much of their income to rent left many young people with little left over, making saving up for a down payment all but impossible.
A Way Forward
So is the starter home gone forever, or can this endangered species be brought back from the brink? There are plenty of challenges ahead, but there is also hope on the horizon. Here are a few steps politicians, workers, and builders can take to resurrect the starter home and make housing more affordable for everyone.
The same investors who swept in during the depths of the housing crisis could play a role in bringing back starter homes. Some landlords are already offering creative rent-to-own pathways to their tenants, allowing them to devote part of every rent check toward the purchase price of the home. Expanding these informal programs through tax incentives and other means could expand the supply of affordable housing in the future.
Workers can also vote with their feet, moving from high-priced parts of the country to areas where housing is still affordable, and starter homes are relatively plentiful. The wealth of work-from-home and telecommuting options could make those kinds of moves possible, allowing high-tech workers and others to do their jobs without sacrificing their futures to ever-rising rents.
The disappearance of the starter home did not happen overnight, and the crisis will not go away quickly either. The housing market has changed enormously in recent years, driven by the housing crisis, the changing nature of homeownership and a host of other factors. Starter homes are not as plentiful as they once were, but a combination of creative solution and buyer behavior could bring affordability back to the market.
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