It's time to ask, is the new "starter" home history?

It's at least an endangered species.

Why? How could such a quintessential bastion of contemporary American housing, the literal deed and doorway from fantasy-land pining to the American dream, fall into question? Entry-level gave meaning to what American society uniquely offered people who "wanted in" on a path to relative wealth, a foot in the door of full-recognition and belonging in communities. Entry-level was the "there" that many people worked and worried and dreamed of getting.

Now, there's less there, particularly in the new-home variety.

BUILDER, as we speak, is looking into the data and the perspective on why, and how much, and what the questions, what the answers, what the challenges, and what the solutions may be to the fact that entry-level, starter homes are so scarce right now, with little expectation that a big wave of them is around the next corner or over the next rise in the horizon.

Let's explore for a moment the scope of our inquiry.

Now, we know that the median new-home price entering 2015 is well over $280,000, giving rise to the common silly assertion that home builders are charging too much for their homes. We also know from the Census that "first-time" buyers of homes are in the high 20% or low 30% range, rather than the normal two of every five homes going to a first-timer.

Incorrectly, many people infer that "first-time" buyers and "entry-level" buyers are the same. In fact, "entry-level" or "starter" home buyers are a subset of the "first-time" buyer set. This is an important detail to remember in our story. Entry-level refers to a price-band at the lowest end of the home price spectrum; a true entry-level home lowers the barrier to entry to homeownership, typically for a renter to move into a home he or she owns.

So back to the original question and why it may be critical for home builders and developers to understand the answer sooner than later.

Is the starter home history?

Three big forces make this a plausible idea.

  • Lots: The lots that have sold and been brought into service during the first part of the recovery in the past 30 months or so have mostly been finished lots of "A" quality, with relatively little attention being paid to B and C and D lots that need development and marketing. Land and development costs have stayed stubbornly high from the moment the land transaction light went on in 2012, and have gone up to bubble levels in many markets. Lots that could be programmed for entry-level or starter homes would--in a typical recovery cycle--involve high-density (attached) or outer-circumference tracts. Costs of lots in those two areas--and relief on some gnarly construction defects litigation trends on attached homes--need to come down measurably for there to be a return of entry level housing.
  • Fees: All of the focus on entry-level housing finance has been on the expansion of the "credit box." This will be a welcome tweaking of barriers to borrowing entry for some buyers, effectively expanding the pool of qualify-able buyers by pushing down minimum down payments and lowering monthly payments associated with mortgage insurance premium payments. Still, the real rub for would-be new, starter home buyers is sticker shock on the price of the house itself, and a lot of that shock comes from local entitlement and permit fees that effectively "ward off" entry-level neighborhoods from already established communities. Fees and charges that get baked into the price of a new home can add 20% to 25% of the cost of a new home, all in the name of underwriting new infrastructure and schools and expanded support services.
  • Preference: Perhaps a phenomenon we need to begin looking at in a strategic way is that many of today's typical "entry-level" candidates don't want an "entry-level" or "starter" home. They've waited longer to form households, pay down student debt, hook up with significant others, and amass their "ability to repay" profile, and now they're not going to settle for a mere deed that gets them a ticket out of monthly rental payments.

We believe that millennials' wait for homeownership may fundamentally change what the first-time buy is all about. They may not—in a general way—ascribe to typical "starter" home purchase as a stepping stone toward a more permanent family residence.

If you look at millennials waiting and the expanding life-expectancies of baby boomers to the point where two more home purchases may be common post 55-plus, some structural differences may be on the verge of reshaping the new home landscape.

The starter home may be dead. The post-active adult, pre-assisted living home era may have arrived. Maybe it's time to develop an "exit-level" home.