Shortage of Starter Homes Affects Everybody’s Home Sale

I noticed that the National Association of Realtors’ chief economist, Lawrence Yun suspects the slight downturn in September 2015 pending home sales is related to a shortage of homes for first time homebuyers. Yun is quoted by World Property Journal as saying:
"There continues to be a dearth of available listings in the lower end of the market for first-time buyers, and Realtors in many areas are reporting stronger competition than what's normal this time of year because of stubbornly-low inventory conditions…”

So, what’s happening all over the country is that homes are becoming more expensive, to buy and also to rent. Renters are feeling the pressure to buy, but they want to be practical, too. They don’t want to take on too-big mortgage payments, high taxes and ongoing maintenance expenses. They want the price and terms of their first home to actually make sense for them financially.

First time homebuyers are crucial to the entire housing market. There’s a domino effect going on, and if homeowners are hanging onto their first homes, instead of selling and moving up to a more expensive one, that’s a systemic problem. It means first time homebuyers don’t have much to choose from, and it means other homeowners in higher priced neighborhoods have a smaller pool of interested buyers, too.

This problem is not an issue of price, but one of value. Foreclosures and fixer-uppers might be available, but first time home buyers generally don’t want to take on a big remodeling project. They want to move right in, just as they have done in their rentals. They want to make a good buy and have a nice place to live immediately.

So, investors are more likely to buy those foreclosures and fixer-uppers, leaving fewer affordable homes for sale that represent good value as a starter home.

New construction is rarely an option for starter homes because the price per square foot is too high. Condos and townhouses might be in the right price range, but they are not popular for new and growing families. So, that means existing homes are the most logical choice for first time homebuyers.

Real estate agents often prefer working with new homebuyers, and enjoy investing the time to help them learn throughout the process because they don’t have the burden of having to sell a house in order to buy a new one. If prequalified for a mortgage, they are ready, willing and able… the perfect home buyers.

But that perfection comes to a halt if there aren’t homes for sale in their desired price range, in their desired area. Naturally, buyers’ desired price range and area are factors directly affected by their income as well.

The Urban Institute provided data summarized in a June 2015 Wall Street Journal post, which included the following, “…fewer than half of new households formed this decade and the next will own homes. By contrast, almost three-quarters of new households in the 1990s became homeowners.”

That’s a sobering prediction, indicative of distinct demographic changes, which affect the sale of starter homes and, in fact, sales of all homes, in all markets.