High Rates and Prices Leave Many Stuck in a Starter Home
High Rates and Prices Leave Many Stuck in a Starter Home
Squeezed by high interest rates and record prices, homeowners are frozen in place. They can’t sell. So first-time buyers can’t buy.
Squeezed by high interest rates and record prices, homeowners are frozen in place. They can’t sell. So first-time buyers can’t buy.
If buying a home is an inexorable part of the American dream, so is the next step: eventually selling that home and using the equity to trade up to something bigger.
But over the past two years, this upward mobility has stalled as buyers and sellers have been pummeled by three colliding forces: the highest borrowing rates in nearly two decades, a crippling shortage of inventory, and a surge in home prices to a median of $434,000, the highest on record, according to Redfin.
People who bought their starter home a few years ago are finding themselves frozen in place by what is known as the “rate-lock effect” — they bought when interest rates were historically low, and trading up would mean a doubling or tripling of their monthly interest payments.
They are locked in, and as a result, families hoping to buy their first homes are locked out.
Maybe we shouldn't have played with the idea of "starter homes" and maybe its okay for people to live in one place.
Maybe housing shouldn't be a fucking investment vehicle, how about that, and then none of this would be a fucking problem at all.
Starter homes aren’t the problem.
People need different types of homes as a single professional vs family with kids vs retiree.
In a normal market, people would have the freedom to trade out to the right kind of house, and move to a new city if that’s what they want.
Different homes for different stages of life.
“Starter” homes usually refer to 1-2 bedroom homes that aren’t in great school districts. Historically, those are the homes young couples start in because they don’t have kids, and don’t need to pay for the extra square footage and school districts that they’re not going to use.
I hate the phrase "starter home." People don't need 3000 sqft homes unless they have 10 kids.
I lived most of my childhood in a 100 year old 1000 sqft home with 1-2 siblings. Some extra space would have been nice but definitely not 3x as much. My current home would be considered a starter home at 1200 sqft. We will likely add on to get another bedroom and also not have a myriad of toys in the living room but I can't see it adding more than 300 sqft. That would make it a 4 bedroom house with a den which is perfectly fine. People seem to consider anything under 2000 sqft to be a starter home which is absurd.
What we do need is for many starter homes to become available for sale. Many are simply turned into rentals.
People don’t need 10+ kids either.
The never ending diapers that would be 10 kids....
I grew up in an almost 3000 sq foot home with only 5 kids. I know you were using hyperbole with the ten kids thing, but it was cramped with 7. Always sharing bedrooms, never actually getting your own space, no playing music without bothering someone, hard to do homework when your sister is practicing her oboe. If you want a dining room table that fits everyone and a living room where your family can stretch out for a movie, you need the space. (Also I grew up in Florida so no basement or attic. Not sure how those figure into sq footage)
Give me 750ft^2 and 5 acres of woods with enough sunny space for growing some food.
I'd be thrilled.
My wife's best friend, however, has decided their 3500ft^2 2.5 floor + basement house on 3-4 acres with two sheds and a small barn (or xl shed?) isnt enough space for 2 dogs 3 cats and her and her husband.
They just bought this house last year.
I do not understand some people.
Different strokes and all that, but I tend to say the more space you have, the more shit goes in it. We have about 1350sf, two kids, cat, on a quarter acre. We rely on the kids being able to (when they're a bit older) go out around our town, which are homes on properties just like mine, but with parks and a downtown and a meandering Brook with green space all around it. I say to my wife, could we use a little more space? Absolutely. Could we use the space we have a little more wisely? Also absolutely. I just know that if we had more space, we would instantly fill it with more crap, so we're good.
Isn't that essentially worse? I get it on an individual level and having near private access to that much outdoors would be pretty sweet, but even if a small, but sizeable, portion of the population wanted something similar how tenable would it be?
"I just want so much land such that if everyone wanted the same amount, there wouldn't be enough land in the world."
This might be kinda unique, but I’m in a situation where I want to move to a different location (I mostly want something bike-able) and I’m remote so there is not that much of an urgency. It would be silly for me to get rid of my “starter home” because I got it at a very low interest rate.
I would kill for 1200sqft living in NYC
That was also one of my thoughts. My friend lives in Manhattan with two kids in a 900 sqft condo. He is an investment banker.
Ikr. Just bought 1200 and 4 bedrooms (major city, not NYC) and I couldn't be happier
It's going to be about 4k a month though... Not too happy about that part
I'd happily live in a shed if it was large enough to fit the usual amenities. Basically, give me 200sqft and half the cost in rent and watch as I live with almost nothing and be happy. Computer, bed on the floor, small standing shower, and we're like 80% of the way there.
Maybe we shouldn't have kept interest rates at near zero for decades, especially when the economy was doing well. Maybe that would have eased the transition a bit.
Maybe we shouldn't give tax Advantages to predatory corporate landlords.
Interest rates aren't causing this problem.
Low interest helps buyers compete against cash offers from investors and corpos.
When rates are high, it incentivizes that type of buyer because it's costing people who would live there more.
Now, traditional wisdom says higher interest encourages lending because banks like money. But times have changed, they get better returns on student loans, credit cards, or rent after they buy up homes.
There's just better investment opportunities for lenders, and instead of cracking down on the other ways they make money to make lending more attractive, were trying to pay them more to want to do mortgages.
Which is not sustainable.
nobody complete against cash investors. cash wins the vast majority of the time, even given a slightly lower offer, because it's a cleaner transaction for the seller.
Have you ever looked at an amortized loan with 8% interest? You pay more 3x the value of the house on a 30-year mortgage.
But think of the economy. 😡
If housing is a single point of failure for the economy, the economy has already failed.
I wonder how many 1-2 bedroom homes are being gobbled up by baby boomers. I was often out bid by boomers who were downsizing, and had all cash from a 3 to 4 bedroom home sale.
The two groups of people that want small 2 bedroom homes are new home owners and downsizing retired people. And one of those groups has a shit load of equity that they can cash in on.
1/4 of all homes in the Fort Worth area of Texas are owned by private corporations. That seems like a good place to start making changes.
Roughly 90% of residential homes in NYC are owned by corporations
You're forgetting landlords (of all sizes)
It's extremely common in my generation to sit on their first house to rent out as passive income, and plenty of private investment absorbing starter homes to rent as well
More specially, investment groups.
When a monthly mortgage and monthly rent are about the same in a market, then your average Joe Schmoe, will only make money if they’re speculating on a neighborhood. Buy low, let the renter cover the mortgage, sell when the neighborhood comes up.
Wall Street doesn’t need to speculate. Investment groups can buy with cash and the rent coming in is all additive.
Boomers have been much slower to downsize compared with previous generations. Many are getting snatched up by landlords.
Perhaps. Although I lost a LOT of offers to boomers who wanted small 2 bedroom with no stairs.
A "starter home" is still a home, is still a roof over your head and a place to sleep.
And you're not subject to the whims of some slumlord.
Owning your own home (even if it's not "keeping up with the Jonses" compliant) is not a horrible position to be in.
Got a fixed rate 30 year mortgage and I'm paying less today for twice the space than I was paying 15 years ago when I first bought my home. I have a friend who got a relatively tiny 1400 sqft row house for $80k back in 2006 and paid less than $1k/mo in rent + utilities for nearly a decade, until she got married and needed extra space for kids.
If you're confident you won't be moving for the next five years, a house or condo at a fixed rate is consistently a way better deal than chasing apartment teaser rates every 12 months. But landing that kind of space means a steady income in a professional career. Its not something folks in the service sector - with irregular hours and changes in location and depressed wages - can reliably count on.
In the end, this is far more a problem of shitty unreliable working conditions than best-practices for picking a residence.
This comment is so wild to my non US eyes. I had to convert the sqft you gave because I missremembered. Friends of mine are family with two kids and live in a bit more than half that space (80m2) - and are not the exception from what I know.
To see 130m2 "too small for the family" is really weird and I'd love to see/understand where the differences come from. I guess that even how the space is calculated might have an impact. Really fascinating!
Thanks for sharing!
The framing of the article's headline is bad, but the problem is that because people in starter homes can't trade up, first time buyers can't buy starter homes. Ultimately, the problem is that MORE people are stuck renting.
And that's purely descriptive. The people in the starter homes are not to blame, in any moral sense. But people read blame into it because emotionally resonant headlines get more clicks, so they frame it that way.
If those conditions weren’t tough enough, first-time buyers and people in their first homes are now competing against a wave of investors and all-cash buyers who can forgo the mortgage game — 28 percent of U.S. homes sold in April were bought entirely in cash, according to the National Association of Realtors.
Yep when rates are high, people/companies with a lot of cash can take all the profits. Buy up homes and rent them out to millennials and gen-z, who will never be able to afford home ownership.
My spouse and I bought our starter home (3bed 2ba 1107 sq ft) in 2017 for $130k. Now we're trying to upgrade to bigger because we have since had a child and would like another. One bedroom is used as our office because my spouse works from home. But we have no ROOM. Our house is estimated to sell for $290k but we can only afford a mortgage on a $350k house now because of mortgage rates, even after more than doubling our income through job changes. The number of houses in our area in our price range is small, not much bigger than our starter house, and most of the time total gut jobs. We can't go anywhere. There's nowhere to go.
There is nowhere to go. I think that just about sums it up for people today. We have lost our freedom to not enough housing and there is no solution coming.
First, don't share any information that you're not comfortable with. I'm not trying to pry into your life. However, I'm not quite following this your numbers and seeing your same limits.
- 2017 house for $130k at 4% 30 year = $621/month for principal and interest
- 2024 house for $350k-$160k in current home appreciation-$3k (approx) in principal paid on current house means a mortgage on the new house of $187k at 7.5% = $1,318/month for principal and interest
So yes, your mortgage payment would be more than double what it is now, but the difference is only $5208/year more. That's certainly not nothing, but you also said...
even after more than doubling our income through job changes.
Does doubling your income still make $5208 more of housing cost per year difficult?
By pushing up your purchase price and getting a mortgage on a $400k home ($237,000 mortgage with your current equity) would push your monthly payment up to $1,673 or an extra $12,624/year over your current mortgage and interest payment. Unless your starting salaries were pretty low to begin with, it seems like this would possibly be in reach for you.
What am I missing?
Our starting salaries were indeed low. We purchased at the end of 2017 and interest rates had already gone up to 4.7%. And our property taxes are covered by escrow which is rolled into our mortgage payment. Property taxes have also more than doubled on our current house and our escrow payment has gone way up as a result.
And we have also since had a baby, so a lot of our general expenses have increased along with all the general inflation prices increases associated with just living.
Can you renovate your current home to get another bedroom and maybe some more common space?
You could probably get a 2nd mortgage for a project like that but if you aren't familiar with them then you should speak to a financial advisor (one that has a fiduciary duty to you). This may allow you to keep your existing mortgage and rate on the first loan and only pay the higher rate on the 2nd.
We unfortunately live in an HOA neighborhood where they don't allow extensions to be built. There is technically enough space in the backyard to add more, but it would result in us losing half of our backyard which isn't big to begin with.
Developers in recent years have built houses so crammed together that there isn't land to add more square footage.
I'm in a very similar situation, but I'm just dealing with it and being content to own a home. I keep upgrading what I can and have plans in the works to expand our space a couple of ways.
Also thinking about buying some land and building the next house when the time comes
People who bought a house during COVID times were really expecting to sell their house after only a few years? I wish we could have bought a house then. I’d love to be stuck in a house.
There are a lot of lemons with “starter” homes. They’re usually more likely to be older and have more problems. People buy in, realize they got fucked, then want to sell instead of losing their ass on renovations.
Since the housing supply is extremely low, people make offers with zero contingencies / no inspections. If you want to inspect the home, you need to be offering way over asking, otherwise you’re just going to be passed over for someone else’s offer.
Instead of blaming people for the lack of housing on market because they are not moving out of their "starter homes" to buy bigger houses they don't want or can't afford, wouldn't the obvious solution be to build more small houses/condos/townhouses?
There is plenty of empty land everywhere in America, so it's not like housing is supposed to be some kind of finite resource. The way I see it, this is real estate developers attempting to shift the blame for their own shortcomings to the consumer.
Builders are artificially inflating prices by purposefully not building homes. They lobby for zoning laws that prevent the building of affordable apartment complexes and use it as an excuse for why they can’t build more homes. For example they will set an empty 1000 acres as commercial and say they can’t build there even though no one wants commercial buildings.
My town is building a shit load of apartments and townhomes. Everyone on nextdoor hates it. I can't entirely disagree either since infrastructure is lagging far behind for all the new residents.
the upper end of the real estate market has been bought up by investors from the luxury hotel market (thanks airbnb) this has resulted in a downgrade in housing for everyone but investors. It obviously takes 5-10 years for new housing to be built and in the meantime people are becoming homeless, home buyers are stuck where they live as house prices and interest rates go up.
You can fix this today by banning airbnb but its not an ideal solution and even that will take time. It will result in like boomers selling their second homes and airbnb companies selling. It won't fix the speculation problem; we need public housing expansions to ensure the bottom of the market stays fluid which will drive house prices down if bottom tier renters have options.
Boohoo, I'm trapped in the house I can afford. I don't have to pay rent. Waaaaaaaaaaaaaahhhhhh
The article did mention that it's affecting those that are renting because those with the house that is now "too small" can't sell it as the interest rates are too good to give up and the new larger house they'd want is now like 2x as expensive as it was in the past. That means that the house they have now won't become available for someone like me who's looking to buy a "starter home" so I, and people like me, are stuck renting forever.
I'm in the same boat as you. IMO the solution is to make it so expensive to own rental houses that the people holding on to them are forced to sell. That would free up a ton of real estate.
The phrase "Starter homes" no longer exists IMO. The homes that used to be starter homes are really way out priced and no longer really being built.
Instead this phrase is more along the lines of "starter condo". Developer's are only really building single family homes now (in north America) or large condo towers. One is for families and the other for singles/couples or investors. Most condos in a 3-4 bedroom range as well are nonexistence or priced higher then a single family home.
Things like fire codes and parking minimums are really causing this IMO. Most cities and towns are talking about the "missing middle". These are homes placed between highrise condos and single family homes, such as four plexes, low rise developments and laneways. There are a few other examples as well.
Unfortunately developers can't build these, not because of week demand, but because things such as parking requirements and fire code restrictions really make these developments not financially feasible for developers, plus cities can choose to shoot down any proposals or permits which adds to the cost. (Better to build whats know and tried)
I think a majority of this depends on the market. I have seen 4 houses sold on my street in the past 2 months. And 3 of those were in May, and the 4th was April but is being flipped I think and back on the market with a higher price (more inline with the current area - and to recoup renovation costs).
Stuck paying for my landleech's second mortgage.
Lack of an "upwardly mobile" world was what killed the video star