The Average Price of a Starter Home Across the U.S.
Starter homes might be losing their luster, partly because millennials are approaching homeownership differently from previous generations. However, it's not entirely by choice. The National Association of Realtors (NAR) reported that the average price of homes purchased by first-time home buyers was $219,300 in the final quarter of 2018. This is a 9.5 percent increase over the average price from 2016. Such rising prices and larger student loan debt have made it more difficult for young professionals to save enough money for a down payment on their first home.
This means it is more common for millennials to rent or live with their parents longer before buying their first homes. When they do buy, they often skip the starter home and move into something nicer where they plan to spend more time.
There is no fixed definition for what constitutes a starter home, but it is generally considered to be a house with a price on the low-end of the market. Real estate website Trulia.com, for example, defines starter homes as those making up the lower one-third of the market, based on home value.
Income levels have not kept pace with rising home prices since 2016, according to NAR's data, making it more difficult for first-time home buyers to qualify for the best interest rates on mortgages. Median income for first-time home buyers in 2016 was $46,190, which exceeded the amount necessary for a prime rate by more than 10 percent, based on a mortgage for a home valued at the median price for first-time buyers.
By the end of 2018, first-time home buyers had increased their median income by nearly 9 percent at $50,305, but higher home prices and higher interest rates meant they fell short of qualifying for prime rates by more than 3 percent.
Finding the Best Deals
It's still possible to find an affordable starter home if you are willing to do some legwork. Starter-home inventory has an established trend of increasing during the fall months, which could provide some home price relief.
Your entry-level home also could come through alternative methods, such as a short sale. This type of home purchase occurs when a seller's mortgage lender agrees to accept a mortgage payoff amount that is lower than the remaining balance on the seller's existing loan. These opportunities, however, are rare and generally can be found only in a buyers market.
Another option is to purchase a real estate owned, or REO, property. Banks come into possession of these types of homes via foreclosures. Because they'd rather not hold onto these properties, they might be willing to part ways with an REO property at a discount.
Be sure to work with a reputable real estate agent in either case.
Starter homes aren't always move-in ready. Many starter homes are considered to be fixer-uppers, which is understandable since their price is on the lower end of the scale. So, when buying a home, it's important to consider repair costs in addition to whether or not you can afford the down payment and the mortgage payments.
For example, if you earn the median income of $50,305 for first-time buyers and you buy a median-priced home with a 20 percent down payment, your monthly mortgage payment would be about $1,084 based on interest rates as of the fourth quarter of 2018. Multiply those mortgage payments by 12 months, and that amounts to about 25.8 percent of your income. Can you afford significant home improvements on top of that?
If not, it might be smarter to buy something cheaper that will allow you to afford to invest in repairs or renovations. In a best-case scenario, the repairs you make will increase the value of the home more than the cost of the repairs. If your mortgage payment is too high and you can't afford the repairs, you run a greater risk of the home losing value in the market.