In a recent article published by Trulia, the affordability, availability, and overall quality of starter homes have declined since they first started tracking this segment of the market in 2012. Unfortunately, starter homes have been hit hard by price increases and the recent supply shortage. Here is what they found recently as they studied current trends regarding the market for starter homes.
Analysis of 2017 Q1 with 2018 Q1
When comparing these two starting quarters, they found that the housing inventory actually went up by 3.3%. However, this stands in stark contrast to the starter home inventory, which saw a 14.2% decrease. As for price increases, starter homes also came out unfortunately on top with a 9.6% increase, with trade-up homes coming in behind starter homes at 7.2% and premium homes at 5.2%.
And finally, the most disheartening number to come out of this report is the portion of income required to buy a starter home. Rising 4.2%, it currently sits at 41.2%. This makes the old 28/36 rule harder to achieve for new buyers. The rule has served previous buyers fairly well, with them only dedicating 28% of their income to purchasing a home and using 36% for debt payments.
Factors leading to unaffordability and quality
The shortage of supply and high demand for homes has led to the increase in home prices as exemplified in the previous section. However, coupled with unaffordability due to the supply shortage and high demand has also bred a new problem—lower quality homes that are available. Six years ago, 10.6% of all starter homes comprised of fixer-uppers; now, that number has increased to 11.2%. The highest concentration of these unaffordable homes can be found in California markets primarily, with Boston being the only outlier to make the list.
Why Is California so unaffordable?
As mentioned before, there is a housing supply shortage, and this has plagued the market in California where homes being built to meet the rise in population demand has fallen behind many other states. According to the article “5 Reasons California’s Housing Costs Are So High,” the state housing department estimated that we would need to build 180,000 homes a year to keep up with demand—we have only averaged less than half that.
Other reasons that are cited in the article include the increase in demand to live in urban areas, which is in part due to the tech industry. However, the tech industry is not solely responsible for this. Many people now prefer living in urban areas, and as such, has driven home prices and rental prices sky high.
Among the other reasons include the unseen consequences of Proposition 13 passed in 1978, the decrease in the construction labor force, increase in land and raw material costs, as well as the bureaucracy of getting new housing approved. Sadly, there is not a single solution available that can solve the whole problem. But nevertheless, the situation in California appears to be grim and acts as an extreme example of the decline in starter homes across the nation.