Where Have All the Starter Homes Gone?
The substantial long-term lack of newly built entry-level homes being introduced into the markets is growing faster than the overall supply problem.
Minnesota, like most of the nation, is facing a housing supply crisis. Inventory of both new and existing homes for sale are at historical lows. In 2018 Freddie Mac estimated the United States had a shortage of 2.5 million homes. In the fourth quarter of 2020, they estimated that shortage had grown to 3.8 million homes nationwide.
Now, a new crisis has emerged. Freddie Mac identified the substantial long-term lack of newly built entry-level homes being introduced into the market as a challenge that is growing faster than the overall supply problem. The segment of entry-level homes being built in the early 1980s was about 40% of homes. In 2019, entry-level homes made up only 7% of all new homes.
Source: Freddie Mac
The lacking amount of starter homes currently being built is an accumulation of many factors. Shortage of available construction labor, land use regulations, land supply, and others. The most recent barrier has been increasing raw material costs, stemming from the start of the pandemic with lumber prices climbing by more than 150%.
However, one of the largest barriers hindering the construction of starter homes are stringent zoning regulations in many local municipalities. These ordinances have all but barred many of these smaller and more affordable homes to be built due to minimum lot sizes, costly aesthetic standards, garage requirements, and more. These requirements all but bar homebuilders from being able to build starter homes at an affordable price point.
However, these homes are still needed in order to keep a housing market balanced. Demand for these homes has only increased as record low mortgage rates are driving first-time homebuyers to get into the market. Millennials, who are largely at peak homebuying age, are rushing into the housing market and, for the first time, making up a major portion of homebuyers. However, they are being met with a housing market that has been underbuilding affordable starter homes for years.
This high demand and low supply equation is also generating an increase to prices, thus making all homes less affordable especially to first-time homebuyers.
According to the Minneapolis Area Realtors, the median sales price of a home in the Twin Cities hit $350,000 in June- a 14.8% increase from June 2020.
Source: Minneapolis Area REALTORS
The demand for homeownership is not expected to slow anytime soon. This out-of-balance housing market is making the dream of homeownership much harder for those who wish to achieve it. Allowing starter homes to be built in the communities where they are needed is a necessary step to making homeownership more affordable and attainable.