Some 45 million Americans are expected to reach the typical “first-time homebuyer” age in the next decade, which is a fresh 34 years old. This is 7.4% more than the 41.8 million individuals currently aged 35-44, per a new analysis from Zillow.
In short, this means there’s the potential for even more demand than usual in the starter home market as those aged 24-33 transitioned from renting to owning. But it also means you might want to skip the starter home completely and just go for the forever home, or at least a property you can keep for the long haul.
A Shortage of Starter Homes
Over the past five years, so-called “starter homes” (those in the least expensive third of the market) gained 57.3% in value. While that’s great news for those who purchased such homes back in 2013-2014, it’s terrible for those still renting.
Another unfortunate truth is that many on the homes in this tier weren’t purchased by young couples with a dog that were planning to have a baby. Instead, they were purchased by institutional investors and later turned into single-family rentals. So they’re effectively off the market, perhaps for decades to come if that nascent business remains fruitful.
Regardless of who bough these homes, it means there are a lot less of them for those looking to enter the real estate market in their mid-30s. Indeed, inventory in the bottom third of the market has fallen 23.2% during the same time period, essentially creating a shortage or even a crisis for first-time buyers. So what is a first-time buyer to do? It’s not like rents are getting any cheaper, what with the many renters that also exist.
Avoid the Competition, Buy the Move Up Home First
One thing you could do, assuming you have the required income and assets, is skip the starter home phase altogether.
While some might scoff at the idea, it should be noted that homes in the middle third of the market appreciated just 36.8% over the past five years, while the most expensive third of homes rose only 26%.
So for starters, they haven’t seen nearly as much appreciation on a percentage basis as the starter homes. Additionally, there’s a lot less competition for the middle-tier and most expensive homes. These ones actually sit on the market…
If you set your sights on a starter home, there’s a good chance there will be a bidding war or at least healthy competition. There’s also a high probability the seller is flipping the home, since these cheaper properties tend to be the perfect candidates for a quick flip.
Flippers know what type of property is most in demand, and it happens to be the lower-tier homes.
Aside from the competition, which will likely drive the price up even higher that it should be, there’s also the quality of the homes in question.
Homes that were recently purchased on the cheap and renovated are often aesthetically pleasing but what lurks beneath the surface?
Is the Starter Home Actually Cheaper
When all is said and done, you might wind up spending just as much on the starter home as you would have by just going up a tier.
The mid-priced homes might be listed for a bit more, but if there’s no bidding war, and even a price cut and seller concessions, you could get a better deal, especially if you don’t need to move again anytime soon.
There are plenty of low down payment mortgage programs available nowadays, even on more expensive homes, which require just 3% down or less. A different Zillow analysis found that recent home buyers needed an additional 1.5 years to save for a down payment than they did 30 years ago. But back then it was customary to put down 20% when buying a home. Today, not so much.
So if you believe down payment is an issue, it might not be once you explore financing options. And when it come to monthly payment, another $100,000 in mortgage only costs roughly $500 more per month thanks to the low mortgage rates available.
Ultimately, most folks want to move into a home they can actually keep for more than a few years. It’s super cliche to buy the starter home, have a kid, then realize you need more space and list your property, complete with photos of the nursery. But it’s also an extremely expensive progression.
When you factor in the costs to buy and sell two homes, obtain two mortgages, move twice, etc., the starter home becomes even less appealing financially.
It’s also very stressful to move, especially at a time when you might be expecting a new member of the family.
When it comes down to it, purchasing a home should never be a rash decision – you should be looking for a keeper, not a “right now” home.
