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Where Oh Where Has the Starter Home Gone?

by Nic Darling on March 26, 2009 · 20 comments

in Philosophy

Sometimes I just want to ask a question like the one in the title and resist the temptation to immediately bury the query with my own ideas. I want to simply let the question hang out here in the magical interweb and gather the varied thoughts and opinions for which our readers are known. But, if I did that, this wouldn’t be much of a blog, and to be honest, I don’t have the self control. So, I’ll do the next best thing and try to keep my comments brief.

There are a few definitions of “starter home” out there, but I’m going to posit one of my own. A starter home is an affordable, modestly sized home that meets, but does not exceed, the needs of the typical first time home buyer. It’s scale and amenities are designed for comfort, efficiency and ease of maintenance, providing a place to live without unreasonable expense. (Sound right?)

For some reason this type of home seems to have largely disappeared from the new construction landscape. Buyers looking for such a home, at least in Philadelphia, have to buy a remodel or an older home which is, of course, fine, but why aren’t there more new homes being built to this concept?

There are probably many answers to this question, but for the sake of brevity I will only propose a couple. Feel free to point out others in the comments.

I think we have seen a change in the way homes are viewed. They have, in the minds of many buyers, become an investment opportunity, part of a larger plan. Rather than being viewed as a place to live and an expense in the monthly budget, the home has become a financial move. Money is sunk into this investment with faith in a future return. This faith encourages the buyer to “invest” as much as possible leading to the purchase of bigger, more elaborate homes regardless of their suitability to the situation of the buyer.

This way of thinking has several problems which have become more obvious as the economy deflates. First, the buyer often forgets the overall expense of the home, including maintenance and utilities, which increases with the home’s size (and with fluctuations in the market). Second, any gains in value the home makes due to positive changes in the market are reflected in the other homes around it. So, when the home is sold, any gain in value is muted by the fact that one must purchase another home who’s value has also increased. (Houses can be buy and hold investments. Homes, generally are not since they have to be replaced.)

One’s house can certainly be leveraged as an investment, but it might be wise to think of it as a home and living expense first and an investment second.

Another reason behind the disappearance of the starter home may be the access to easy financing that we saw over the past decade. Virtually anyone could get a loan with little or no money down. This loan, as we have seen illustrated in the past year or so, often exceeded the means of the person taking it. The homes purchased, I would argue, also exceeded the needs of those buyers. Demand shifted entirely away from small 2 bedroom homes and moved to a minimum 3 bedroom 2 bath, 2500+ square foot home that is relatively over-sized for the average first time buyer.

I think that the shift in the economy, particularly the increased difficulty in getting bank financing, will mark a return to the starter home. In fact, we at Postgreen are banking on it.

Have you noted the disappearance of the starter home or is it just me? What other reasons are behind this missing stage in the story of home ownership? Do you think we will see a return to more modest first homes as buyers are required to put more of their own money into the deal? What role might higher energy costs play?

Okay, so I failed to be brief and I ended with too many questions. Forgive me or not, but do it in the comments.

If you enjoyed reading this post I can promise you'll love our new writing over at Postgreen Homes. Yeah, we know that's the same thing your favorite band said and their new album is nowhere near as good as their early stuff, but seriously, we are actually still getting better.

There also isn't much conversation to be had here . . . at least not with us. So come on over to the Postgreen Homes Blog and tell us what you think of our new(ish) digs and crazy ideas. We will be sure to tell you what we think of your opinion.

{ 20 comments… read them below or add one }

1 Lloyd Alter March 26, 2009 at 1:02 pm

When I started in the real estate development business I went to one of the bigger developers of urban townhouses and apartments and asked him how he decided the size of his units. He had a rule: Take one third of the average income and calculate the maximum mortgage that will support, and divide by the current cost per square foot. Don’t build a square foot less or more. That usually meant very small stacked units. In the states that didn’t work because the banks didn’t limit loans. Now that they are, KB homes is building 800 footers for $65,000 in Houston. The starter homes are back.

Although with twenty million empty homes in America, I am not sure we need them.

2 Colin O'Brien March 26, 2009 at 2:13 pm

I was living in Phoenix, AZ during the housing boom. I could not believe the price of sand could rise so high but it did thanks to people taking free money and buying what they had no intention of really living in. You are dead on about the view of housing being an investment first, dwelling second. Right there in the wording is the problem. People bought houses and not homes. A house is a structure, a home is your place to build families, relationships, a life. Instead of places where people could hang their hats, houses became places to temporarily hang their flat screens (which they also got on credit and couldn’t really afford). Starter homes not only need to make a comeback they should be an almost mandatory set of real estate training wheels. Making the buyer smarter through experience as well as the bank could help prevent another meltdown in which both borrowers and lenders intentionally got in over their heads.

3 lavardera March 26, 2009 at 2:21 pm

Condo apartments and “townhouses” became the equal of starter homes. I’m eager to see individual homes for this market again.

4 Nic Darling March 26, 2009 at 2:48 pm

Llyod: In the case of those 20 million empty homes, I wonder if there is a portion of those that are doomed to their emptiness. Maybe we will end up with a certain percentage of homes that, due to their exurb location and sprawling inefficiency, will remain vacant. Monuments, of sorts, to errors made. It is hard to argue that building a new home is better than using an existing one but might there be some cases where that is true?

Colin: Love the idea of real estate training wheels and the illustrated value of semantics.

Greg: I agree. Condos did pick up some of that slack but it would be nice to see fee-simple single family homes pick the role back up. Condo fees can definitely add to the expense of a home.

5 jon March 26, 2009 at 4:53 pm

I don’t know this for a fact, but I wonder if lot sizes have anything to do with the issue. Here in Seattle, there are very few open lots for single family homes available. And those that are, are typically located on or near the shoreline – posing their own unique set of challenges. What municipalities are doing then is subdividing new land into larger plots. That leaves a developer with 2 options: buy an existing house and inherit any and all problems associated with it, or develop on new land where they can invest their money to maximize their return (a.k.a. Build more to sell more). Out here, your main options are to buy a “warbox”, workforce housing built for Boeing employees in the 40s, or move outside the city to find a newer/new construction.
At any rate, that’s my thought. This is written on my phone so I hope it all makes sense.

6 Azucar March 26, 2009 at 4:54 pm

To me, the condo boom took the place of the starter home. As space became more of a premium in urban and bedroom communities–not to mention the desire of the developers to make the most amount of money on a specific footprint of land–the condo supplanted the starter home.

We also have to look at the way people live these days. While I’m a married young professional who is also a mom, people get married later and have children later. A starter home is far less appealing, with its need for maintenance and yard work, to young professionals.

I would have been thrilled to find a starter home ten years ago, but there wasn’t much available in our price range so we bought a condo instead. Now that we have two kids, and maybe want more, we’re skipping the starter home size and going straight to something that has at least 3 bd/2bth and at least 2000 sq ft.

I love the idea of starter homes, I hope they make a come back, but as long as developers want to maximize profit in highly-desirable and centrally located areas, I think we may be out of luck.

7 Pinkrobe March 26, 2009 at 6:03 pm

Here, starter homes are either 500 sq. ft. condos close to downtown or 2000+ sq ft houses a full hour out from the core. They cost the same and tend to hold the same number of occupants. The differential becomes travel time to work and entertainment. Houses that are close to the core are routinely purchased by developers and redeveloped as “executive homes”. Inevitably, these infills are twice the average home price, exceed 2000 sq. ft. and have no yard to speak of.

Personally, I would love to split my lot in two and build a 1200 sq. ft. two-storey home. That would allow us enough space for 1 car, 10 bikes, a vegetable garden and a place to entertain…

8 Andy Weber March 26, 2009 at 8:46 pm

Forgive me for this lengthy comment, but your post really nailed it for me. I’m a project manager in the commercial building industry, and after seeing you guys on the Inc. Magazine site and following your blog, it really triggered a passion in me for sustainability and modern design.

10 years ago, I was a single college graduate just moving to a new city and it was extremely difficult to find a decent starter home. I would think there are many others in the same boat, and with Generation Y now having such a huge influence on the economy, surely what you are doing would appeal to those guys in a big way.

About two years after I graduated college, I felt like I was ready to buy my first home. I really wanted to live close to the city but found that all I could afford was either a fixer-upper in a very transitional neighborhood or a cookie-cutter developer house (yes, “house”…not “home”) about 40 minutes from downtown. I wasn’t ready to do the fixer-upper thing yet and didn’t want to live in a condo, so I (shamefully) bought the cookie-cutter house in the burbs. I still view that as one of the dumbest things I have done. My thinking at the time was “Hey, I can make some money off this in the next couple years, then move back in town to a cooler neighborhood. The commute won’t be THAT bad.” HA! Well, when it came time to sell the house two years later, it took over a year to find a buyer and by that time I was dying to get back in the city.

I finally moved to one of the edgy up-and-coming areas of Atlanta to a fixer-upper that I also knew would only be a temporary residence. Again, make more money to move to something bigger and better in a safer neighborhood, right? Well, in retrospect that may have been one of the smarter things I have done. We had a great time being so close to bars, restaurants, parks, etc., and I worked my butt off on the house, learned a lot, and made a good profit. We have since found a great home in a great neighborhood, but we still kind of think of it as an investment because the schools aren’t so hot around here. We just had a little girl and it seems it costs a fortune to get a home in a good school district, which is a whole other discussion in itself. I feel like we not only need to be discussing affordable starter homes, but also affordable homes for young families who want to live in an urban environment. Is that even a possiblity in a large city? I would love to hear your thoughts on that.

9 Kevin D March 27, 2009 at 3:36 am

Many cities are now promoting accessory dwelling units (ADU’s) as an antidote to unaffordability. ADU’s have been illegal since the advent of single family zoning laws which fostered a misguided fear of density.

In desirable urban neighborhoods, the starter home of the future will sit on the alley.

More info at:

10 Russell Wild March 27, 2009 at 1:20 pm

Great disscusion. Nic you hit the nail on the head about house vs home. I have always felt that a house is “generally” a terrible investment. Instead of buying a starter home I bought commercial property. I bought three properties on the EDGE of downtown Memphis. This is a formerly industrial area but sits between downtown and the Medical district. This has worked out for me. I purchased all three for $185,000. Gutted and restored one in my free time. Sold it two years later for a $140,000 profit. The second was a paved lot. Now it is half a Park and Pay earning $1,000 a month the other half is a patio that I rent to the new owner of the first property I SOLD earning $300 a month. The third property has developed itself by starting with low rent and requiring the tenants to make the improvements and maintenace. It is now a 4,500 s.f. night club w/ full kitchen and central HVAC renting for $3,000 a month plus taxes. As you can see, my initial investment has paid off. We rent a 2,000+ s.f. Downtown loft that is paid for by the profits with a couple grand extra each month. It is a lovely home to me, my wife, youngest daughter, two dogs and piranha tank. If I had purchased a home for that $185,000 I would be paying the notes myself, paying for all the upkeep, improvemts, utilities, etc. The value would probably not increase at the cost of living rate. It just doesnt make sense. The problem here lies in the Joneses. As long as peeps try to “appear” that they are keeping up, they will never get ahead. I think a starter home is the best investment for a residential purchase. I would buy one but Id rather buy commercial and let my tenants pay my way.

P.S. – I am primarily a Residential Architectural Designer, working mostly for the Joneses and their friends. Please dont tell them my secrets. :)

11 David Brown March 27, 2009 at 7:55 pm

Great post. I think the starter home has also become the victim of a lack of creativity, but necessity drives creativity so hopefully the coming months will see a resurgence of both. Actually, I think that this blog is evidence that the above is indeed happening. The more people attempt to build new models of modest yet honest housing the stronger the starter home’s comeback will be. As “green” becomes “lean” first time home buyers will rejoice, I’m sure.

12 tom toolbag March 28, 2009 at 10:34 am

Good topic! My best guess is that there’s no money in it for a builder or buyer. Developers make a lot of money on the lot, some on the house, and most are a broker or have an agreement with one to capture part of the sales commision. Then there is the “homeowner’s association” dues that they receive and control until the development is done. Most of them get the city to put in utilities/roads/sidewalks because they anticipate the tax revenues. Most are builder specific, and if not have min sq/ft sizes and the plans must be approved by them if built by another builder.
Let’s say you buy a starter house within your budget that is close to your employment but under $100,00. Not all neighborhoods in that price range are very nice, then there’s the condition of the house. Repairs, taxes and INTEREST makes this a very bad investment.
Homes over the last 114 years have averaged 4/10′s of 1% return per/year. The stock market has averaged an annual(before inflation) 7% return, 10% if you reinvest the dividends. If you shorten the time-frame of average returns on homes, at best it is 1-1.5% return per year, and the long-term average inflation rate is 3.1%. The only way buying a starter home makes sense is if you keep it and rent it out. Most homeowners have what I call the “lack-a’s”. They have one of the following: a lack of money, skills, knowledge, tools and equipment, or time or even a combination of all of them.
I myself own 12 houses and rent from my business partner’s wife a house she inherited. He owns 14 house himself, and together we own 4 and just bought another 4. I find, buy, and remodel houses for a group of doctors that have an investment group. The $700-$900 range, one story, full basement, 2 potentially 3 bedroom, 1 with an add-on 2 bath, 1500-1800 or 2000 sq/ft with a decent yard rents VERY easily. I have a waiting list of 12 people and 5-7 more call each week, and within the next three monthes should be able to rent them a house myself or through one of my conections. The main problems with houses in this range are: unattached 1 car garage that is built far more substandard than the house and too close to lot lines, old trees that are overgrown and expensive to remove or trim down, the water main coming in is too shallow and undersized.
Th whole buy a house with a big yard and fence routine never made sense to me. Most people have a substantial part of their life savings wrapped up in a house. It is their biggest asset by far, but yet subject to market forces and the value plummeted. If you could live in a house that is energy efficient, have snow removal done for you, all appliances including a washer and dryer, have a low monthly payment, and a $100 bill given to you at Christmas every year, and rent adjusted every third year, does buying make much sense?

13 alm March 29, 2009 at 7:35 pm

Houses are made out of sticks and bricks which generally depreciate over time, not appreciate. A solution would be to revisit the old idea of separating purchase of the house from the lot with the much stigmatized “mobile home”.

Even though the idea of modular housing is beginning to get some traction with forward thinkers, mobile homes are still thought of as a plague on the neighborhood. Let’s face it modular homes are mobile homes without wheels. When was the last time someone actually used the wheels on a “mobile home” and who says that mobile homes have to look so traditional and square?

Here is a proposal for some developer who has now found himself with land that is not worth what he paid for it and in a particularly unattractive time to build and sell conventional houses on lots for sale- Try developing a “trailer park” with a new twist toward modern architecture and the lifestyle to compliment it. This could offer an opportunity to create a cash flow on a non-performing asset in a relatively short time and an affordable alternative to houses sold with the dirt under them.

Mobile or modular homes are now being manufactured that meet the housing needs of a new generation of buyers who might not be as interested in investing 40% of their monthly income in a house payment on the gamble that the land it sits on will make them rich some day. Making a commitment to the leasing of space for modular homes to be placed and improved upon could provide a viable alternative to conventional for sale housing or rented apartments.

We should also try to address up front, in the conditions of approval, some of the onerous end of lease buy out terms or the absence of maintenance guidelines that trailer park owners have historically been trapped by and that have allowed trailer parks to deteriorate so badly over time living up to their plague on the neighborhood reputation. Why not create this nice, new, affordable, green alternative to for sale housing?

Worth a try? Any builders/developers out their listening?

14 Andy W March 29, 2009 at 9:47 pm

alm: I think you raise some good points. Knowing very little about trailer park leases, I’m not sure how things like resale and obtaining financing would work. However, I was wondering if you could structure a sustainable, modern community similar to the way a condominium building is structured. Meaning…the ‘neighborhood’ would be the equivalent of the ‘condo building’, and each resident would own their own units within that neighborhood. They would pay you a lease on the land as well as dues for upkeep of the neighborhood but would own their unit. This could allow someone to get into a starter home in a cool, sustainable, in-town community at a cheaper price because they would only be ‘buying’ the home itself, not the land around it. Again, not sure of all the logistics, just throwing out ideas.

15 Pinkrobe March 30, 2009 at 2:42 pm

Damn fine thread we’ve got here!

It’s interesting to see the different perspectives on the value of a home. From 2001-2008, the average house price in Calgary doubled [approximately]. In some years, average annual increases in price were hitting 25%. The big factor was land. Pressures from an increasing population drove inner-city demand ever upwards. If you had a subdividable 50′ lot, developers would bid to bulldoze the existing bungalow and put up the biggest duplexes they could. In the last year, we have seen a drop in the average home price of only 12%, but odds are we’ll be back to double-digit annual increases soon enough.

My point is that most of the value of houses around here is in the land. Without that, most homes are a depreciating asset, like a car or any other durable hard good. The idea of a movable home that could be carted from lot to lot as your situation changes is an interesting one. I honestly don’t know how that would be received here. It’s sort of like a condo, but you wouldn’t pay property tax [although the property owner would extract it through fees, and with a markup]. Effectively, you’re renting the land and its amenities. This isn’t really different than renting an apartment and bringing your couch and TV with you, or staying in a hotel and bringing your clothes and a toothbrush. It’s all on the same continuum.

16 Max April 1, 2009 at 10:47 pm

Hi- Well I am an affordable housing developer. . . this is a really good thread. Not that I would ever pretend to have “the” solution, but there are a lot of models out there that have been done and work depending on the local market. These include Community Land Trusts, Housing Co-ops, mutual housing associations, ‘cottage’ developments, and ADU’s (which were mentioned above) as well as various subsidies including USDA 502 loans, SHOP funds, FHLB and HTF subsidies, etc.

Fundamentally though, new construction is expensive, land is often expensive, and you can’t build an “old” (i.e. depreciated) building.

Modular construction is becoming more accepted outside of rural areas, but it’s not the panacea that the dealers or the architects think it is. The main reason they are less expensive has more to do with labor costs than with efficiencies. I really think that to create ‘workforce’ housing or starter homes, the builder and market have to be willign to accept 800 – 1200 sqft units in much denser arrangements.

17 tom toolbag April 3, 2009 at 4:48 am

Pinkrobe, you hit the nail on the head!! The true value is in the land, not the house. Our business model revolves around the delapidated house,(outdated, neglected, not modernized) that is a diamond in the rough. The condition of the house lowers the value of the land and makes the purchase price a bargain. There are many factors that came into play though. Basically any house from 1950 to 1970, sometimes as high as 1980 to 1985, is a steal for me. After 1980 though, subdivisions became the new direction, and with that aim production became the mindset. Houses were built on “developed” land, what I call non-virgin soil. Foundation problems are very common, although most of those houses are ranch-style, single-story houses. I don’t do duplexes because the rental rate is lower, and the buy-in price is out of whack or too high, not to mention people like their own space. The older house usually has a very good foundation, but sometimes the concrete stoop or steps are massive, and the hydraulic pressure has pushed in the foundation. They usually have a 6/12 pitch roof which is a plus for this area(N. Illinois). The layout of the house is not very practicle more often than not, but I change it anyway to have a first-floor laundry. The structure of the house itself is sound and with todays technology in materials an older house can be refurbished fast and what I think is economically. I aim for a no-touch house for 20 years, and it’s not unattainable in this day and age. The average length of time for my renters is 6-8 years. There are even some that are longer, my first rental has only had 1 tenant. Most people will stay with 1 child, but with 2 children wil consider moving, although not always. People more often than not look at the monthly housing expense and weigh out the benefits. A lot of the tenants do not want to own a house because of the time and money involved. The last 10 years of building boom is relly coming back to haunt a lot of people, especially the one’s that thought that their home was an investment, and everthing they did to it was done with borrowed money. The house is only worth what someone will pay you for it, and the only real return is if you sell it. Increasing the value $50,000 is useless unless you want to pay more taxes or you sell it.
Todays stagnant wages do not allow a lot of people to save for down payments. Add in financing and a house can double in price by the time that you “own” it. Now you own a house that more than likely needs structural attention(30 years). Heck,I have tenants that are landlords also.

18 Thom April 24, 2009 at 1:19 pm

tom toolbag -

Seems to me you’re the reason why the affordable “starter home” is gone. You buy them all up and make them into rentals, taking them off the market. Shame on you. You are using them as “investments” to further your bottom line, driving up the prices. Why don’t you sell them to people who would like to own a home. You have too many “houses”.

19 Jumjum July 8, 2011 at 8:10 pm

So it is true! I bought 100 year old 1,800sqft home in East Hampton NY and want to tear it down and rebuild fresh! They said it’s going to cost 500k and I only have 100k+ change. How am I going to make it! Help. It’s in the village and it is only my summer home!!!!

20 Justin October 23, 2011 at 1:43 am

Great article, I liked it so much I put a link to it on my blog about our fixer upper: Beauty is in the eye of the beholder with a starter home. My wife and I just bought ours for only 124k in a nearby suburb of Minneapolis/St. Paul. It’s in a neighborhood where the median price is 180k so we got lucky that we found such a great deal. The drawback though of course is that it needed a new water heater, new furnace, new windows, total cost so far… $6700! You have to make sure you’re committed enough to purchase a starter home and know what you’re getting yourself into. With that said, it worked out for us!

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