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.
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