The starter-home market bears brunt of price and inventory woes

This spring home-buying season first-time home buyers may feel as if their American Dream might be a nightmare. Starter homes have become scarcer, pricier, smaller, older, and more likely in need of some TLC than they were six years ago when Trulia began monitoring housing prices and inventory.

In this edition of Trulia’s Inventory and Price Watch we find that across the board homes are the least affordable than they have ever been since we started tracking inventory and prices in 2012. Starter homes, however, have borne the brunt of the rise in home prices and decreases in inventory. These homes have seen a 9.6% increase in prices since this time last year and starter inventory hit a new bottom this quarter.[1]

Examining the housing stock across the nation from Q1 2017 to Q1 2018, we found:

  • Housing inventory is up 3.3%, the first time it has hit positive territory since this same period in 2015, however starter home inventory plummeted 14.2% this quarter.
  • Starter homes led price increases across all segments; the median listing price for available starter homes increased 9.6%, while prices for trade-up and premium homes rose 7.5% and 5.2%, respectively.
  • Homes are increasingly unaffordable. The share of income needed to purchase a home across starter, trade-up, and premium segments reached new highs, largely due to increases in mortgage rates since the start of 2018. The portion of income needed to buy a starter home surged up 4.2 percentage points since this time last year, up to 41.2% — well above the 30% maximum experts recommend.
  • Nationally, total inventory tumbled to the second lowest level since Trulia began tracking inventory in 2012. The biggest dips in overall housing supply were led by Knoxville, Tenn. (-30.1%), San Jose, Calif. (-26.2%), and Las Vegas (-19.9%).

[1] Note that in this version of Inventory and Price Watch we took the national share of each segment after taking the weighted average of the counts. This corrects calculations in previous reports.

 

Are Starter Homes a Non-Starter for First-Time Buyers?

In addition to facing dwindling supply and escalating home prices, starter home buyers must also contend with homes on the market that are smaller and lower quality than they were six years go. Looking at how the inventory of starter homes has changed over the past six years, we found:

  • Starter-home quality appears to be on the wane as measured by a home’s age and the share of those that are fixer-uppers. Starter homes are on average over nine years older than they were in 2012.
  •  Starter homes are also less likely to be move-in ready, with fixer-uppers comprising 11.2% of the starter home segment compared to 10.3% six years ago. Among all housing segments, fixer-uppers have actually decreased by 0.6 percentage points down to 4.8%.
  •  Starter homes shrunk by 2.0% in terms of square feet, while homes at higher price points grew by 8.6% more square feet.
  •  Some markets saw the share of fixer-uppers among starter homes rise considerably; Camden, N.J. (12.8 percentage point increase), Philadelphia (8.5) and Oklahoma City (8.0) led markets where fixer-uppers became more common than they were in 2012.

The rise in overall inventory masks the lopsided supply changes across housing segments. While inventory is up 3.3%, this quarter’s year-over-year increase has been driven almost completely by a 13.3% annual increase in premium homes. Meanwhile, starter home inventory plummeted 14.2%. Nationally, in fact, starter home inventory dipped to the lowest number since this report started keeping track at the start of 2012.

2018 Q1 National Inventory and Price Watch
Housing Segment 2018 Q1 Inventory Change, 2017 Q1 – 2018 Q1
Median

List Price

Share Inventory % of Income Needed to

Buy Median Price Home in Segment

% Change in Median

List Price

Percentage

Point

Change in Share

% Change in Inventory Additional Share of Income

Needed to Buy a Home

(Percentage

-Point Change)

Starter $180,931 21.5% 217,717 41.2% 9.6% -4.4 -14.2% +4.2
Trade-Up $311,234 22.9% 231,691 26.9% 7.5% -0.5 +0.9% +2.2
Premium $646,188 55.6% 563,468 14.6% 5.2% +4.9 +13.3% +1.1
Among the 100 largest U.S. metro areas. Share is the percent of for-sale homes that fall into each segment, which is defined separately for each metro. Median price for each segment is the stock-weighted average of the median price of each segment in each metro. Percentages are rounded to the nearest tenth, which will explain what appear to be arithmetic errors. The full data set can be downloaded here.

 

Affordability Squeeze Tightens Again

Home prices and the share of income needed to afford a home among the starter home segment also outpaces both trade-up and premium segments. The acute inventory shortage among the starter home market translates to a steep 9.6% increase in starter home prices since this time last year. With 41.2% of income needed to buy a starter home, the 4.2 percentage point increase is the largest year-over-year rise across all segments on record. In comparison, trade-up homes command a 2.2 percentage point increase in the share of income needed to purchase a home, while premium homes require a 1.1 percentage-point increase.

The markets that are the least affordable are concentrated in California with Boston being the sole market not located in the Golden State. In some of the most expensive places in the country like San Francisco, San Jose and Los Angeles, those income earners at the bottom third of the market would need to spend all their income and more (over 100%) to afford a median starter home.  The starter home price among all ten of these markets has also increased since this time last year.

America’s Least Affordable Housing Markets
U.S. Metro Share of Income Needed to Buy a Starter Home (Y-o-Y Percentage Point Change) Median Price of Starter Home (YoY % Change) Change in Starter Home Inventory
(Q1 2017 – Q1 2018)
San Francisco, CA 121.8% (18.0) $820,550 (12.4%) +0.6%
San Jose, CA 104.3% (13.6) $692,296 (12.0%) -20.4%
Los Angeles, CA 103.5% (13.2) $389,933 (10.9%) -9.8%
Orange County, CA 83.7% (7.2) $461,333 (4.3%) -11.3%
Ventura County, CA 79.6% (8.8) $421,450 (7.2%) -36.8%
Oakland, CA 76.6% (8.8) $444,666 (8.7%) -33.4%
San Diego, CA 74.6% (3.9) $369,650 (1.1%) -9.6%
Sacramento, CA 63.6% (9.9) $269,417 (12.7%) -1.1%
Boston, MA 62.0% (8.9) $294,933 (11.6%) -20.1%
Riverside, CA 58.9% (10.2) $226,300 (13.8%) 0.0%
The full data set can be downloaded here.

Starter Homes Shrinking (in Inventory and Size)

Not only are starter home buyers facing some of the lowest inventory on record, but the homes available to them on the market are less appealing in terms of size and quality. While the average size of a home has increased from 2012 across all listings, starter home listings have shrunk to 1,187 square feet from 1,211 square feet in 2012. We also identified homes that were fixer-uppers using terms in listing descriptions such as “fixer,” “as-is” and “TLC” (see Methodology for the full list of terms). These fixer-uppers now constitute a smaller share of all listings now than they did six years ago, but among starter home listings, they have increased to 11.2% from 10.3% of listings.

Square Feet, All Listings Square Feet, Starter Listings Age (Years), All Listings Age (Years), Starter Listings Share of All Listings that are Fixer-Uppers Share of Starter Listings that are Fixer-Uppers
2012 Q1 1,708 1,211 31.1 44.1 5.5% 10.3%
2018 Q1 1,854 1,187 36.1 53.3 4.8% 11.2%
 The full data set can be downloaded here.

The rise of fixer-uppers among available starter home inventory points to a particularly alarming trend of decreasing quality and hidden costs. Fixer-uppers represent—along with the age of homes—lower quality homes. So even while starter home prices have appreciated nearly 60% since 2012, prospective homebuyers are getting far less for their money. In fact, a fixer-upper might even be a trade-up home in disguise; the price of repairs along with potential rental payments while a fixer-upper is being upgraded could push the true cost of the home into the trade-up segment. Increased competition and high prices also means that sellers have little incentive to upgrade properties before listing them.

What Does the 2018 Home Buying Season Hold for First-Time Home Buyers?

Starter home buyers are facing a perfect storm of the lowest inventory, the highest prices and the lowest levels of affordability among all housing segments. In addition, the quality and size of homes available in this segment has worsened to the point where first-time home buyers are likely to feel their choices are even more limited. Meanwhile, mortgage rates have been climbing since the beginning of 2018, worsening affordability. While 2017’s housing starts reflected the highest numbers we have seen in 10 years, they have yet to translate to any relief in the starter home segment.

Methodology

Each quarter Trulia’s Inventory and Price Watch provides three metrics: (1) the number and share of inventory that are starter homes, trade-up homes, and premium homes, (2) the change in share and number of these homes, and (3) the affordability of those homes for each type of buyer.

We define the price cutoffs of each segment based on home value estimates of the entire housing stock, not listing price. For example, we estimate the value of each single-family home and condo and divide these estimates into three groups: the lower third we classify as starter homes, the middle third as trade-up homes, and the upper third as premium homes. We classify a listing as a starter home on the market if its listing price falls below the price cutoff between starter and trade-up homes. This is a subtle but important difference between our inventory report price points and others. This is because the mix of homes on the market can change over time, and can cause large swings in the price points used to define each segment. For example, if premium homes comprise a relatively large share of homes for sale, it can make the lower third of listings look like they’ve become more expensive when in fact prices in the lower third of the housing stock are unchanged.

Our national metrics are a weighted sum of listings and weighted average of affordability of the 100 largest metropolitan areas and our inventory measure is an average of snapshots taken on the first of each month of the quarter. Last, we measure affordability as the share of income needed to purchase the median priced home in each segment relative to metro-area household income terciles. To lessen the downward skew of income of households in the lowest tercile, we estimate starter homebuyer’s income using only household incomes of homeowners within this segment.

Note that in this version of Inventory and Price Watch we took the national share of each segment after taking the weighted average of the counts. This corrects calculations in previous reports.

The characteristics of starter homes reflect the listings included in the inventory counts for the standard Inventory and Price Watch report. Metro level characteristics such as square footage and age of home are reported as medians while national metrics are weighted averages of the 100 largest metropolitan areas. Fixer-uppers were identified using keywords available in property listings descriptions from these listings, where available. Listings descriptions that included terms such as “fixer,” “as-is,” “needs work,” “deferred maintenance” and “TLC” (including all letter case combinations and like permutations of these terms) were flagged as fixer-uppers.