The Starter House Is Nearly Extinct
I mentioned the “housing crisis” to a friend a couple months ago, and he looked at me with slight confusion: “Which one?”
I can forgive this reaction easily, and in fact it was a helpful reminder. Most people are experiencing a squeeze from record-high housing costs in the past few years. Headlines certainly reflect this as one of the major economic “stories” of the moment. But not everyone is experiencing remotely the same thing. A graph shared on Twitter by economist Adam Tooze makes that clear.
Here is the graph, originally from Calculated Risk:
The graph shows price bands representing new homes sold in the United States since 2002. Over that time period, the share of new homes priced at under $300,000 has dramatically fallen to fewer than 10%. As recently as 2015, half of new homes were in this category.
This is one clue to the very different housing crises being experienced by Americans in different socioeconomic strata. On the one hand, you’re a home seeker whose price point is higher, you’re experiencing the squeeze in some ways: the rising cost of rent or a mortgage, fewer good deals to be had, tough competition for available homes, and the need to compromise on desired features or location.
If you’re in that low-end price range, on the other hand, what you are experiencing is having to give up on buying a home altogether. Increasingly, there are whole cities where homeownership on a modest income is all but impossible—at least without some source of financial help, often from parents.
In these places, people who, in a prior generation, would have become homeowners are pushed into renting indefinitely. It’s not that renting is an inferior choice, but in this case, it’s not by choice. That, in turn, is helping fuel an even more insane escalation in rents, with some cities posting eye-popping jumps in average rent in a single year. (A Realtor.com analysis comes up with a figure of 20% increase in 2021 alone across the 50 largest U.S. metro areas, with some Sunbelt cities closer to 40%.)
Lower-income renters, in turn, are pushed into ever worse, more precarious, and more abusive rental situations. The housing market is a giant game of musical chairs, and the worst effects shake out at the bottom, among those who struggle to stay in the game at all. (Or fail to: Homelessness rates are associated, more than anything else, with a city’s overall cost of housing.)
There are a lot of facets to this story, but one possible crux for understanding it is the rapid disappearance of the low-cost “starter” home from the American landscape. It’s a startling story, and—despite how quickly it appears to have occurred in this graph—one decades in the making.
A few points to understand:
We didn’t build nearly enough homes in the 2010s to meet demand. New home construction fell off a cliff when the market crashed in 2008. But after several years of recession, it never recovered to previous levels. The construction industry faces a generational labor shortage, and local regulations prohibit the construction of enough new homes in the places they’re most needed.
The housing crisis isn’t just coastal anymore. Rents are shooting skyward in places like Phoenix and Boise. Some of this is driven by outmigration from the most expensive places: For over a decade now, states like California and New York have experienced a working-class exodus, with fast-growing Southern and Western cities as the destination.
The cheapest existing homes are being bid up. When new supply lags demand, it’s not just brand-new homes that become expensive. Existing “starter” homes, and the neighborhoods filled with them, face an intense wave of demand from buyers priced out of locations they might otherwise prefer. (The same thing happens in the rental market, with apartments that are smaller, older, or less ideally located.)
The result is that the homes that might have made homeownership an attainable goal for a working-class family in a lower-cost metro area a decade ago are mostly not attainable to that same family today.
“Starter” homes are a magnet for institutional investors. Adding to the challenge for would-be first-time homeowners is that homes in the lowest price tier are the most likely to be bought up by investors who operate them as rentals. Large institutional investors who buy single-family houses, such as the infamous Invitation Homes, have chosen to heavily concentrate their attention on neighborhoods full of inexpensive homes in growing metro areas—precisely the kind that might be somebody’s starter home. They are available as rentals, but there is a missing rung in the ladder for people of fewer means who might want to get into homeownership. Increasingly, there is no way in.
Builders rarely build small, inexpensive homes anymore. While “luxury housing” is more of a marketing buzzword than a meaningful physical descriptor, there is certainly truth to the fact that most new homes built in America today would have looked like mansions by the standards of a half century ago. Houses have simply gotten bigger and bigger.
Don’t look to greed for the explanation: look to public policy. (I assure you the big developers of the 1950s were as greedy as the ones today.) Minimum lot sizes and zoning-related caps on density and height do a lot to incentivize larger houses, because they put a floor on the fixed costs, such as land and infrastructure, associated with a single unit of housing. The soft costs associated with permitting fees and delays in receiving permission to build have the same effect, privileging deeper pockets and larger projects.
(Source: Unsplash.)
There’s a lot of nuance to nitpick about this graph, of course, if you want to nitpick. For one thing, there’s the chicken-egg question of inflation. The numbers here are not adjusted for inflation, but there is no straightforward way to do so, since housing costs are themselves one of the major drivers of inflation. In any case, home price increases in the past decade have far exceeded income gains.
While we need to make it easier to incrementally grow neighborhoods and add housing, we also, specifically, need to work to make it viable to build small, modest homes again. This can mean a lot of things. It can mean smaller apartments, with less floor space and amenities. It can mean the missing-middle housing, built mostly by small local developers, that used to be the backbone of every city. It can mean accessory dwelling units, or just small-lot houses.
The housing crisis looks one way if you’re on the ladder already and trying to maintain your foothold. It looks very different if you’re trying to reach for the lowest rung, and find that it’s missing entirely.
Daniel Herriges has been a regular contributor to Strong Towns since 2015 and is a founding member of the Strong Towns movement. He is the co-author of Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis, with Charles Marohn. Daniel now works as the Policy Director at the Parking Reform Network, an organization which seeks to accelerate the reform of harmful parking policies by educating the public about these policies and serving as a connecting hub for advocates and policy makers. Daniel’s work reflects a lifelong fascination with cities and how they work. When he’s not perusing maps (for work or pleasure), he can be found exploring out-of-the-way neighborhoods on foot or bicycle. Daniel has lived in Northern California and Southwest Florida, and he now resides back in his hometown of St. Paul, Minnesota, along with his wife and two children. Daniel has a Masters in Urban and Regional Planning from the University of Minnesota.