The Demise of the Starter Home

Home builders of a certain age know that if you can build and sell new homes for two-and-a-half times median household income in a neighborhood, people will line up around the block to buy them. Bill and Al Levitt knew it, and in March 1949, when they first put their stripped-down two-bedroom, one-bath, single-story Cape on the market near Hempstead, N.Y., for $6,990, they had 1,000 couples show up on the grand-opening weekend with their $60 first payment in hand. (Median household income in 1949 was around $3,100.) In today’s dollars, two-and-a-half-times the median household wage gets you to $130,000. Not a home builder out there, save in a few isolated markets, can sell a new home for that price and not go broke. Is it possible to build for the low-end and entry-level buyer at all any more? In an eye-popping feature article in Builder, an edited version of which appears below, deputy editor Les Shaver confirms what we've long suspected: The American Dream of the affordable house is in peril. Here's why:

1. The Economy, Stupid

With personal savings sapped, joblessness rising, and qualifying for a loan increasingly beyond reach, demand for the $200,000 (and lower) home plummeted after 2008.

2. The Price of Land

During the Great Recession, lots went for pennies on the dollar. Those days are long gone as Metrostudy guidelines say estimated price per bulk lots has gone up from around $50,000 in the recession to over $80,000. “It’s really difficult, given what land prices moved up to, for a builder to make that entry-level product pencil out,” says Rick Palacios Jr., director of research for Irvine, Calif.–based John Burns Real Estate Consulting. “More and more builders have been chasing that luxury and 55-plus buyer, and all of that stuff is at higher price points.”

3. Expanded Regulations

Cash-thirsty localities heap fees upon fees that weigh more and more heavily on final home price tags. Chris Cates, co-owner of Fayetteville, N.C.–based Caviness & Cates Communities, estimates that regulations that stipulate he has to convert stormwater ponds to permanent ponds and bond items such as street lights, sidewalks, landscaping, and retention ponds have doubled his development costs.

4. Labor Shortages

When the recession hit and many contractors had to close their doors or at least cut head count, laborers went in droves back to their home countries or found work elsewhere. “In Texas and fracking-heavy markets, I think a lot of people left construction to work in that sector,” Palacios says.

As builders kick-started operations, labor suddenly was a lot harder to find. The Associated General Contractors of America (AGC) says labor costs have risen from $22.51 per hour in April 2012 to $25.13 in December 2014. 

5. Material Costs

The jump in residential materials is even more striking—it rose 45% over the past decade, according to AGC chief economist Ken Simonson. Mark Tollefsrud, vice president of sales and marketing at Houston's Legend Homes says builders are pulling out the value-engineering stops to get to $200,000, including staying below 1,700 square feet; sticking to 8- or 9-foot flat ceilings; eliminating features like fireplaces; shifting to laminate countertops and 30-inch-high cabinets; avoiding crown molding or tile backsplash in the kitchen; and limiting brick to the front of the home.

Kenneth T. Seeger, president of MWV Community Development and Land Management in Charleston, S.C., thinks the only way a builder can hit the sub-$200K threshold is to build a vinyl box with minimal finishes. “I think it’s very, very difficult,” he says. “It’s not impossible, but you’re right at the edge of possibility. It would be a very, very inexpensively built house. You can’t afford Hardie Plank siding or real plank siding [like many municipalities demand]. You have to go with vinyl.”

6. Location, Location

Finding land at a price that works for a sub-$200,000 selling price means going to deeper suburbs and outlying areas, which is something many customers—including the coveted millennial—say they’d avoid if they can. “You need to fill up with gas before you go look at [these communities],” says Stephen East, a partner and senior managing director at New York–based ISI Group, an investment research firm.

7. Zoning

If you want to build homes on more expensive ground—closer in to job centers and business hubs—a solution is to build in density. But local governments tend to hit reject, having entitled expensive, bigger-lot projects in the previous cycle. Since then, the market has adjusted and these bigger-lot homes have lost some luster with consumers. However, many local governments haven’t detected the change and altered their own stances.

“Right now, the entitlement requires you to build a certain [large lot] size, and you’re not able to build that,” says Emile Haddad, president and CEO of Aliso Viejo, Calif.–based Five Point Communities, an independent real estate development and management company jointly owned by Haddad and Lennar Homes of California. “If certain cities want to activate the market, they’re going to have to go back and redo entitlements and downsize. If you can do that, you can build a single-family detached home, price it to the market, build it, and make money on it.”

8. The Customer

Does today’s starter-home buyer—a millennial adult more often than not—really want to move into a boxy, no-frills home with Formica and vinyl, after living in high-tech student housing and ritzy apartments with granite countertops?

“The expectation of what a customer thinks should be in a house at that entry-level price point is kind of crazy,” says Matt Riley, director of sales and marketing at Raleigh, N.C.–based Royal Oaks Building Group. “They want granite countertops, tile backsplash, and stainless steel appliances. People are used to the newer apartment complexes.”