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New Starter Homes? Not Enough Profit to Build

The traditional lifetime moves from smaller to larger homes may be permanently disrupted due to limited amounts of land and rising construction costs.

NEW YORK – There were smiles aplenty at the ribbon-cutting event at the Village Gardens in Seattle. The occasion? To celebrate the completion of 16 modern-looking starter townhomes not too far from Jimi Hendrix Park in the city’s Central District neighborhood.

About eight homes will be available to households that make less than 80% of the area’s median income, and two will be for those considered homeless or who had financial problems keeping a home.

“We got super frustrated by those who didn’t believe us, that there is a lack of homes for middle-median income folks,” said Kathleen Hosfeld, executive director of Homestead Community Land Trust, the organization that worked with the city to build the affordable housing. “This is not just a Seattle problem, this is happening nationwide.”

The USA is having a major affordable housing crisis, especially for first-time homebuyers looking to purchase a home ranging from 1,800 to 2,400-square-feet, the typical size of a starter home, according to experts.

It invites an obvious question: Are starter- or entry-level homes on the verge of extinction?

“They’re not extinct, but they are endangered,” said Robert Dietz, chief economist for the National Association of Home Builders. “It’s much harder to find and build homes in smaller quantities in today’s market given the demand, space challenges, and potential regulatory burdens. The submarket that’s been least supplied has been the entry-level home.”

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.

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%.

The big demand and a small supply of homes lead to fewer prospective buyers, said Rose Quint, the National Association of Home Builders’ assistant vice president for survey research. At its pandemic peak last spring, 61% of prospective buyers were “actively trying” to find a home to buy, Quint said.

“Now, the share is back to pre-pandemic levels, at 46%,” Quint said in a recent post. “This is clear evidence that higher mortgage rates and double-digit growth in home prices are discouraging a growing share of buyers from engaging in the purchase process.”

It’s happening across the USA, Quint said. The share of active buyers in the Northeast region fell from 72% to 50%; in the Midwest from 51% to 40%; in the South from 58% to 48%; and in the West from 72% to 46% during the past year.

Home prices increased nearly 20% in major cities in February, according to the latest S&P CoreLogic Case-Shiller national home price index and National Association of Home Builders research found the cost of building materials has increased 33% since the start of the pandemic.

As the average 30-year mortgage rate hovers at 5%, the highest in a decade, the USA is experiencing its highest inflation rate in 40 years, a combination discouraging buyers, Quint told USA TODAY.

“Affordability is going to be an issue in this country for the foreseeable future,” Quint said.

Many spend three months or longer trying to buy a home before giving up, Quint said. About 48% said their inability to find an affordable home was the No. 1 reason they quit looking. The next highest reason was the inability to find a desirable neighborhood (34%), followed by the inability to find a home with desirable features (31%), and being outbid by other buyers (29%).

Quint said she expects the outbidding percentage to fall to the low 20s as fewer people make offers, but the competition is still a turnoff to potential buyers.

‘Power buyer’

Sarah Gullotti of Riverside, California, can relate. She and her husband Brandon made at least 20 offers on homes during the pandemic as they craved more space for their growing family. They kept coming up short, often because of sellers taking all-cash offers, among the hottest trends in a hot housing market.

“We just weren’t getting anywhere and were finding it very frustrating as homes were selling fast,” Gullotti said.

About a year ago, Gullotti saw a social media post for Flyhomes, a startup “power buyer” that helps qualified buyers get their new house by providing all-cash offers to sellers. All-cash purchases make up 33% of home sales, compared with about 19% at this time two years ago, the National Association of Realtors reported.

Skeptical, Gullotti showed the post to her husband who was also suspicious.

“We figured it was some sort of millennial disruptor company,” Gullotti recalled. “We said what kind of loan shark is this?”

But the couple were intrigued enough to part with their traditional real estate agent and try Flyhomes. After seeing a few houses, the couple bought their home last March for about $474,000 with the help of the startup.

About 70% of Flyhomes customers are first-time homebuyers, CEO and co-founder Tushar Garg said. He said Flyhomes customers are four times as likely to have the winning bid for their home.

“We hear people say constantly that they can’t win in this current market,” Garg said. “Our goal is to try to help solve that problem.”

“It would be hard to move”

The Gullotti’s house qualifies as a “starter home” in terms of size and price. The value of a single-family home was $474,000 in California in 2021 – a 22% spike from 2020, according to Zillow.com. Still, that wasn’t bad, considering the typical home value in California is $774,899, Zillow said.

Since their purchase, the Gullottis, who had two children, Liam, 5, and Elijah, 2, had a third son, Ben, who’s four months old.

Since the purchase, the Gullottis have done some remodeling of their three-bedroom, three-bathroom home, including adding a home office for Sarah, a designer who works remotely part-time.

She has high praise for Flyhomes. “Otherwise, we would’ve had to make a lot of compromises, including the size, style, and price,” she said.

The family plans to use the startup again if they need to buy a bigger home.

“You know, we put everything into this remodel, (so) … it would be hard to move from a sentimental perspective,” she said. “But if we have to move into something bigger, maybe we’ll rent it out to a family who is in a similar situation as we were. Starter homes are extremely hard to come by.”

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