You might have heard that it’s hard to find an entry-level starter home in 2021. It’s true. An ongoing supply shortage has increased competition within the U.S. housing market, while driving inventory to record-low levels in many cities.
There are two main reasons why it’s so hard to find a starter home in 2021. The first reason is a steady decline in single-family home construction that stretches back several decades. The second reason has to do with reluctance among homeowners. The coronavirus pandemic and other factors have made many homeowners hesitant to sell.
Add in a sharp rise in home sales over the past year or so, and you’ll get the picture.
A new report from Freddie Mac sheds new light on this situation, and shows why it is so hard to find an entry-level starter home in 2021.
Chart: Why Starter Homes Are So Hard to Find
Earlier this month, Freddie Mac published a housing market report that gave some historical perspective to the ongoing supply shortage in the U.S.
Among other things, their report revealed a steady decline in new-home construction, specifically within the entry-level or “starter” home category.
The chart below shows the amount of new homes being built with less than 1,400 square feet, as a percentage of overall construction. The size category relates to the point of this story. These are typically entry-level or starter homes, the types of properties that first-time buyers often seek out.
As you can see from this chart, the percentage of smaller homes as a share of overall construction has declined significantly over the past few decades.
Consider the evidence:
- Back in the early 1980s, smaller entry-level type homes made up 40% of total construction activity in the United States.
- By 2020, the percentage of smaller home construction had dropped down to around 7%.
A Perfect Storm of Inventory-Reducing Factors
But it’s not just smaller starter homes that are in short supply in 2021. The decline in construction has been felt up and down the square footage and pricing spectrum.
According to the May 2021 Freddie Mac report:
“The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes and that decline has been exacerbated by an even larger decrease in the supply of entry-level single-family homes, or starter homes.”
There are several reasons for the decline in new-home construction over the past few decades. Currently, the construction industry is plagued by an ongoing labor shortage as well as high lumber prices.
Additionally, zoning restrictions limit the number of houses that can be built in many parts of the country. Often, these zoning rules are strictest within hot real estate markets that have the lowest inventory levels.
But it’s the smaller starter homes that have taken the biggest hit, in terms of inventory decline.
A Surge in Home-Buying Activity
So we have a few things going on here. For one thing, homebuilders in the U.S. have been under-building for more than a decade. In other words, they haven’t been building enough homes to satisfy the demand from buyers. This is partly the result of labor challenges and the high cost of materials, among other issues.
On top of that, the United States experienced a surge in home-buying activity over the past year or so. Contrary to logic, the coronavirus pandemic actually fueled the real estate market by giving people a renewed appreciation for homeownership.
Suddenly, everyone wanted more space, home offices, etc. This resulted in a steady increase in home sales, at a time when inventory was already low.
So what we have here is a situation where an already tight real estate market became even more constrained. It’s the combined result of strong home-buying activity and a general reluctance among homeowners to list their house for sale.
Is More Inventory Coming in 2022?
There might be some good news on the horizon, for those home buyers who are seeking an entry-level starter home to buy. Such properties can be hard to find right now. But we could see more properties coming onto the market through the second half of 2021 and into 2022.
According to a recent statement from Lawrence Yun, chief economist for the National Association of Realtors:
“We’ll see more inventory come to the market later this year as further COVID-19 vaccinations are administered, and potential home sellers become more comfortable listing and showing their homes. The falling number of homeowners in mortgage forbearance will also bring about more inventory.”
The bottom line is that U.S. home buyers who are seeking an entry-level starter home in 2021 will have to be patient and persistent. While real estate market conditions can vary from one city to the next, most parts of the country are experiencing a significant shortage of housing supply. And conditions appear to be tightest at the lower end of the pricing spectrum, where first-time home buyers tend to shop.