Understanding the Concept of a Starter Home: What It Is

A starter home is typically an entry-level property aimed at first-time buyers. These homes are often more affordable, smaller, and located in emerging neighborhoods, making them accessible for individuals or families beginning their homeownership journey. Understanding the concept of a starter home involves recognizing its key features, benefits, and the factors to consider when searching for an ideal entry-level property in the housing market.

More compact and budget-friendly homes enable first-time buyers to attain homeownership, yet they are increasingly difficult to locate in today's real estate market.

Key Takeaways:

• Starter homes are smaller, more affordable properties aimed at helping first-time buyers enter the housing market.
• Currently, starter homes are more expensive and harder to find than they were a few years ago.
• The concept of a starter home is evolving as buyer priorities shift.
• Most homeowners begin with a starter home, often requiring some renovations, but these homes are increasingly scarce.

Starter homes have become significantly more costly over the past few years, and the few that are available face intense competition. This situation has led many first-time buyers to question whether purchasing a starter home is worthwhile or if they should wait to buy their ideal, long-term residence.

What is a Starter Home?

A starter home is typically the first property that individuals can afford to purchase. These homes are generally smaller and lower-priced, serving as a stepping stone into homeownership.

According to Michaela Cancel, senior vice president of the Neighborhood Development Company, starter homes can include condos, townhouses, or standalone structures, usually under 1,500 square feet with limited bedrooms. Homeowners often reside in these properties for three to five years, aiming for a return on their investment.

Cancel explains that starter homes tend to be either new middle-market construction or older homes that come with significant maintenance costs. These homes typically lack modern features, as older properties don't meet current preferences, while new budget-friendly options are designed for first-time buyers.

Due to a low supply in the current housing market, starter homes are increasingly difficult to find and are more expensive than in the past.

“The definition of a starter home hasn’t changed; it just isn’t available in the traditional sense,” states Kurt Carlton, co-founder and president of New Western, a real estate investment marketplace. With approximately 80% of homeowners retaining mortgages with rates under 5%, many are not selling or listing their homes.

Thanks to rising home prices, starter homes no longer represent affordable options. According to Redfin, prospective buyers now need to earn around $80,000 to afford a median-priced starter home.

Why Can’t I Find an Affordable Starter Home?

In December 2019, the national median existing-home price across all types was $274,500, according to the National Association of Realtors. By August 2024, the median price had soared to $416,700, a 52% increase.

In 2023, only 352,500 affordable homes were listed, marking a 40.9% drop from 596,135 in 2022. Carlton notes, “What we once called starter homes has become an endangered species.”

A listing is deemed affordable if the estimated monthly mortgage payment is no more than 30% of the median household income in the area. The national share of affordable listings was calculated by dividing the total number of affordable listings in the analyzed metros by the total listings.

Cancel points out that new housing starts have always lagged behind demand, but the U.S. fell further behind during the 2008 financial crisis, leading to decreased demand as consumers feared overpaying in a collapsing market. “The last decade saw marginal improvements in the supply-demand imbalance, but the pandemic hit the shortage hard,” she adds.

Carlton further explains that affordable housing is also scarce because there are about 15 million vacant homes in the U.S. needing renovations. “The good news is that independent investors are acquiring these homes, fixing them up, and bringing them back to market in the middle-income range,” he states.

Interest rates also pose an affordability challenge, according to Cancel, as homeowners with sub-5% mortgage rates are less likely to move. “This shortage of resale homes has driven up entry-level home prices, putting new buyers in competition with cash developers for teardown properties,” she explains.

Is It Cheaper to Build a Starter Home?

Buyers can consider building a starter home, but finding a builder who specializes in affordable homes can be challenging. Census Bureau data shows that in 1980, 40% of newly constructed homes were considered entry-level; by 2019, this figure had plummeted to just 7%.

Clint Jordan, a realtor at The Jordan Group, notes that builders are focusing on higher-end properties due to better profitability. “Building material costs have surged in recent years, labor shortages are prevalent, and some zoning laws make it difficult to construct smaller, more affordable homes,” he explains.

These increased costs are generally passed on to buyers.

Jordan suggests that prospective buyers might find more affordable options in the existing home market. “Existing homes often come at a lower price point since they don’t include the upfront costs associated with new builds. Plus, you can move in sooner and start building equity right away.”

While some builders recognize the demand for starter homes and are trying to meet it, Jordan believes the pace is too slow. “Even if supply increases, it doesn’t guarantee that those homes will be as affordable as buyers hope,” he adds.

What’s the Difference Between a Starter Home and a Forever Home?

A starter home focuses on basic living needs, while a forever home is typically larger and intended for long-term residence, often at least 10 years, according to Zillow. Forever homes usually cost about double that of starter homes and provide around 2,000 square feet, with three bedrooms and two bathrooms, offering ample space for life changes such as a growing family.

Homeowners in forever homes generally have stable jobs and are content in their neighborhoods. While forever homes may not literally last forever, owners usually have no immediate plans to relocate.

“A forever home is one you plan to stay in for decades, whereas a starter home is often viewed as a stepping stone in your real estate journey,” says Jordan.

Is It Worth Getting a Starter Home?

First-time buyers face tough choices: Should they purchase a starter home now or save for their forever home?

Jordan strongly advocates for buying now if you're financially prepared. “Waiting costs you money,” he states. “Every month you rent, you’re wasting money, missing out on equity, and losing potential appreciation from the home.”

Purchasing a home instead of renting allows you to build valuable equity. However, buying is only advisable if you're financially positioned to do so, which includes understanding the costs associated with purchasing a home, such as the down payment, closing costs, and ongoing expenses.

You can also improve your creditworthiness to secure a lower mortgage interest rate, and saving for a larger down payment can reduce monthly payments, a significant hurdle for first-time buyers.

Carlton notes that first-time buyers still desire affordable starter homes but are adapting their expectations.

“They are living with aging parents, adult siblings, or friends to maximize their budget, or they’re adding units to accommodate more people,” he explains. “The definition of a starter home is evolving to cater to middle-income buyers rather than shifting completely.”

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Source: realestate‍