Where have all the starter homes gone?

- First time home buyers in metro Atlanta are finding an extremely tight market at the lower end of the price spectrum.

Why? Since 2010, persistently low levels of entry level housing sales have plagued the real estate market, delaying recovery and leading to speculation as to the root cause. A new in-depth study of the issue reveals a variety of factors have contributed to the phenomenon. 

Real estate expert John Adams is here to explain: 

Question: John, what’s this all about?
Adams:  Tight housing inventory has been an important feature of the housing market at least since 2016. And For-Sale housing inventory, especially of starter homes, is currently at its lowest level in over ten years.
 
Q: OK, that’s unfortunate, but why does it matter to the rest of us?
A:  Because a long-term slowing of sales of starter homes has an impact far beyond the loss of that one sale.
 
In most cases, the seller of that starter home is planning on buying a larger and more expensive home, and the seller of THAT home is planning on doing the same thing.
Once the starter home market is crippled, it has a domino effect on the entire residential real estate market, and no one wants another recession!
 
Q:  Is it really that bad? 
A:  Yes. In metro Atlanta, a starter home buyer could traditionally buy a nice entry level home in new or very nice condition for $125 to $150 thousand dollars.  
 
Today, there is almost NOTHING in that price range, new or used, that is in “move-in” condition.
 
Q:  Well, can’t the buyer just fix the house up on weekends? 
A:  Lenders are very strict about condition. If the home is not in MOVE-IN condition, the loan will NOT be approved.  That is why investors use cash-only transactions and command steep price concessions.
 
Q:  So, what has caused this shortage of entry level starter homes? 
A:  There are several causes:
 
1. The trend for the past year and a half has been toward higher inflation, leading to higher mortgage rates and higher home prices.
 
To make things worse, the Federal Reserve is determined to keep inflation under control by raising interest rates. In fact, they have said so publicly.  So interest rates are, in fact, heading up.
 
Q: What else is contributing to this housing shortage: 
A:  Two new things:
 
1.  Sellers refusing to sell.
 
They may fear that they won’t like what they find in their price range so they are just staying put. Or they may worry that they’ll lose the much lower interest rate on their current home if they sell, so they just stay put.
 
2.  Gen X ers (ages 34-54) are finally emerging from the recession and ready to become homeowners. This generation was hurt worst by the Great Recession, and they're finally in their prime earning years, making enough money to buy a starter home, making the market even more competitive.
 
Q:  Wow, that’s a lot to swallow in one bite. So that’s it? 
A:  No, not quite.  
 
The PRIMARY REASON for the shortage of starter homes appears to be conversion to rentals.
 
During the housing bust, single-family investors swooped into the market and converted homes from owner- to renter-occupancy.
 
Q:  Is that good or bad? 
A:  Well, the investors helped to stabilize prices, remove vacant units from the market, and absorb a virtual flood of foreclosed homes.
 
But now it appears they have also contributed to the starter-home shortage that now appears to be slowing the return of first-time buyers to the housing market.

 

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