Will the Starter Home Return?

May 17, 2017

Homebuilders say they’re struggling to deliver on the demand of lower-priced entry-level homes that cater to the growing number of willing millennial buyers, arguing that more entry-level homes will hurt their bottom lines. 

“Since the recovery has really been at the middle end of the market, home prices have gone up and land prices have followed,” Megan McGrath, managing director at MKM Partners, told CNBC. “So it is very, very hard to make a good profit at a lower price point these days.”  

Few starter homes are available on the market today through existing homes too. During the Great Recession, investors purchased hundreds of thousands of foreclosed properties—low-priced starter homes—and converted them into rentals. They’ve been holding on to these properties, which has spawned an even bigger deficit for lower priced homes on the market. 

“I don’t think anyone’s doing jumping jacks in terms of that lower end of the market, but I do think you’re also seeing … a little slowdown at the middle end, because that’s where the bulk of the recovery has been so far,” says McGrath.

The median price of a new home built in March was $315,000. The median price of an existing home was $236,400. 

Builders are gradually introducing new lines at lower price points. 

“People are doing more townhomes in good locations, and they’re also stripping stuff out of the house to get the price cheaper,” says John Burns, CEO of John Burns Real Estate Consulting. 

Some builders are introducing lower-cost lines of homes, but while they’re lower-cost, they aren’t considered starter homes, CNBC reports. 

The cost of building a starter home isn’t lucrative enough for builders, industry insiders say. 

"It's always a tug of war in builders between order growth and gross margins,” McGrath says. “Those are the two things that investors pay the most attention to. That really tends to be what drives the stocks.”

Demand is clearly growing among young buyers, however. New-owner households are now outpacing renter households, according to the latest Census data. 

Source: “Homebuilders Are Targeting Millennials — But it Will Hit Their Margins,” CNBC (May 16, 2017)