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Since my divorce, I’ve been searching for an affordable starter home. I’m not looking for anything extravagant or brand new; I simply need enough space for myself and my three kids. Ideally, a three-bedroom home with at least one and a half bathrooms would suffice—after all, whenever one child needs to use the bathroom, it seems like they all do! However, finding such a home within a reasonable price range has proven to be a challenging task. The demand for entry-level homes far exceeds the available supply, and many others are in the same boat.
The pandemic has highlighted the issues in the housing market, but the shortage of homes has been a concern since 2018, as noted by mortgage lender Freddie Mac. Unfortunately, this decline in inventory has been ongoing since the 1980s. Back in the early ’80s, 40% of new constructions were entry-level homes, typically around 1,400 square feet with two or three bedrooms. However, by 2020, this figure plummeted to 7%. In the next decade, 45 million Americans will reach the typical first-time homebuyer age (between 34 and 44), intensifying competition among the current 41.8 million people in search of their ideal starter home.
Currently, the market is short by about 4 million homes, and without significant changes in new construction trends, this gap is likely to widen.
What’s Causing the Decline?
The pandemic has underscored the persistent labor shortage in construction. According to a survey by the Associated General Contractors of America, 81% of construction firms reported a lack of skilled workers as a major issue. Builders face further complications from strict land use and zoning laws, limited land availability in populated areas, rising land costs for single-family homes, and the ongoing surge in building material prices. The pandemic worsened these challenges, causing lumber prices to spike by over 150% and increasing wait times for necessary supplies. Although both situations are gradually improving, constructing entry-level homes remains financially unfeasible for builders, especially when costs surpass what a first-time buyer can afford.
Supply Versus Demand
The Federal Housing Agency reports that the median price for an acre of land under single-family homes rose from $159,800 in 2012 to $203,200 in 2017. Builders need to recoup land costs while managing construction expenses, which ultimately drives home prices beyond their actual worth. Despite record-low mortgage rates enticing more buyers into the market, the combination of increased purchasing power and rising home prices has added to the already high demand. The shift to remote work has also made people reevaluate their living situations, leading to a higher demand for homes with ample space for home offices.
As sales increased during this period, inventory remained significantly lower than demand. This imbalance has led to bidding wars and desperate buyers opting to skip inspections to secure their desired homes. I’ve heard countless stories of people losing out on homes simply because someone was able to pay in cash—unfortunately, I’m not one of those buyers.
Is There a Glimmer of Hope?
In my area, home prices are slowly decreasing, but inventory is still scarce, and available options are often out of my budget. I’m doing my best to remain patient, though persistence can only take me so far. I’m collaborating with a community land trust organization designed to assist individuals in affording entry-level homes, but despite the program’s benefits, I haven’t found a suitable home in the nine months I’ve been involved. Some reports suggest that inventory may improve towards the end of 2021 and into 2022, but I realize that timing and luck will play significant roles in my search.
Lawrence Matthews, chief economist for the National Association of Realtors, indicates that we could see more inventory as COVID-19 vaccinations increase and homeowners feel more comfortable listing their properties. Furthermore, the decreasing number of homeowners in mortgage forbearance may also contribute to more homes entering the market. However, the real relief for millions of us will come from the development of new, affordable housing, which is still years away. The demand for entry-level homes will likely continue to outpace supply for the foreseeable future.
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Summary
The search for affordable entry-level homes for first-time buyers is increasingly difficult due to a significant shortage in inventory and rising costs. Factors like labor shortages, land use restrictions, and inflation have all contributed to this issue. As demand continues to outpace supply, hopeful buyers face intense competition and rising prices. While there may be some improvement on the horizon, the need for affordable housing remains critical.