Squeezed by high interest rates and record prices, homeowners are frozen in place. They can’t sell. So first-time buyers can’t buy.
If buying a home is an inexorable part of the American dream, so is the next step: eventually selling that home and using the equity to trade up to something bigger.
But over the past two years, this upward mobility has stalled as buyers and sellers have been pummeled by three colliding forces: the highest borrowing rates in nearly two decades, a crippling shortage of inventory, and a surge in home prices to a median of $434,000, the highest on record, according to Redfin.
People who bought their starter home a few years ago are finding themselves frozen in place by what is known as the “rate-lock effect” — they bought when interest rates were historically low, and trading up would mean a doubling or tripling of their monthly interest payments.
They are locked in, and as a result, families hoping to buy their first homes are locked out.
Maybe we shouldn’t have played with the idea of “starter homes” and maybe its okay for people to live in one place.
Maybe housing shouldn’t be a fucking investment vehicle, how about that, and then none of this would be a fucking problem at all.
Starter homes aren’t the problem.
People need different types of homes as a single professional vs family with kids vs retiree.
In a normal market, people would have the freedom to trade out to the right kind of house, and move to a new city if that’s what they want.
“Normal” is a term used for idealistic dreams that don’t ever exist in reality.
Twice now I’ve sold my smaller home to move into a larger one to accommodate my growing family.
It’s been a normal thing for millions of families, but not when there’s an interest rate spike like in 2023 or 2008.
So its your own personal experience?
Kind of like… normal is your situation you’re using to define what is an ideal everyone else should have and want.
I guess it’s just me, the article’s author, and the millions of families in the situation they described.
Different homes for different stages of life.
“Starter” homes usually refer to 1-2 bedroom homes that aren’t in great school districts. Historically, those are the homes young couples start in because they don’t have kids, and don’t need to pay for the extra square footage and school districts that they’re not going to use.
I hate the phrase “starter home.” People don’t need 3000 sqft homes unless they have 10 kids.
I lived most of my childhood in a 100 year old 1000 sqft home with 1-2 siblings. Some extra space would have been nice but definitely not 3x as much. My current home would be considered a starter home at 1200 sqft. We will likely add on to get another bedroom and also not have a myriad of toys in the living room but I can’t see it adding more than 300 sqft. That would make it a 4 bedroom house with a den which is perfectly fine. People seem to consider anything under 2000 sqft to be a starter home which is absurd.
What we do need is for many starter homes to become available for sale. Many are simply turned into rentals.
Give me 750ft^2 and 5 acres of woods with enough sunny space for growing some food.
I’d be thrilled.
My wife’s best friend, however, has decided their 3500ft^2 2.5 floor + basement house on 3-4 acres with two sheds and a small barn (or xl shed?) isnt enough space for 2 dogs 3 cats and her and her husband.
They just bought this house last year.
I do not understand some people.
Different strokes and all that, but I tend to say the more space you have, the more shit goes in it. We have about 1350sf, two kids, cat, on a quarter acre. We rely on the kids being able to (when they’re a bit older) go out around our town, which are homes on properties just like mine, but with parks and a downtown and a meandering Brook with green space all around it. I say to my wife, could we use a little more space? Absolutely. Could we use the space we have a little more wisely? Also absolutely. I just know that if we had more space, we would instantly fill it with more crap, so we’re good.
I fear the same. I am largely a minimalist but my wife is not and kids never are. But it would be nice to have a living room without toys absolutely everywhere and it would also be nice for them to each have their own space (own rooms). My sister in law lives in a very large house (~3300 sqft) and it is still filled with stuff that often doesn’t get used.
My $750/month mortgage is offended at the term starter home. I like to call it my “forever home”.
cries into his $2400/month mortgage
Maybe we shouldn’t have kept interest rates at near zero for decades, especially when the economy was doing well. Maybe that would have eased the transition a bit.
Maybe we shouldn’t give tax Advantages to predatory corporate landlords.
There’s certainly a lot that can still be done, interest rates are just one lever.
Incentives to buy ONE home, but far less of them to get a second (and none, or start making big penalties for 3+)
Or just prohibit corporate ownership of single family homes and townhouses. Let them build condos in walkable cities and leave the farmland alone.
This is such an obvious solution that I’m surprised there isn’t wider discussion on laws pushing this.
Corporate real estate investors own a lot of politicians, and there is no organization or superpac that looks out for literally everyone who isn’t rich. We don’t have a seat at the table.
first_time.jpg
Progressive residential property tax rates. The first home, low tax. Second home, a bit higher. Third home, a bigger bit higher and so on until somewhere around the 8th or 10th one the annual rate hits 100% and keeps going.
Maybe we just shouldn’t let corporations own residential property and limit individuals to say 5-10 homes. That way we don’t have 4 corps owning all the homes and rich people can still have vacation homes in half a dozen states
Maybe we should maybe
Interest rates aren’t causing this problem.
Low interest helps buyers compete against cash offers from investors and corpos.
When rates are high, it incentivizes that type of buyer because it’s costing people who would live there more.
Now, traditional wisdom says higher interest encourages lending because banks like money. But times have changed, they get better returns on student loans, credit cards, or rent after they buy up homes.
There’s just better investment opportunities for lenders, and instead of cracking down on the other ways they make money to make lending more attractive, were trying to pay them more to want to do mortgages.
Which is not sustainable.
nobody complete against cash investors. cash wins the vast majority of the time, even given a slightly lower offer, because it’s a cleaner transaction for the seller.
Have you ever looked at an amortized loan with 8% interest? You pay more 3x the value of the house on a 30-year mortgage.
But think of the economy. 😡
Inflation was low. Raising interest rates when inflation is low is a recipe for persistent deflation like Japan has.
If those conditions weren’t tough enough, first-time buyers and people in their first homes are now competing against a wave of investors and all-cash buyers who can forgo the mortgage game — 28 percent of U.S. homes sold in April were bought entirely in cash, according to the National Association of Realtors.
Yep when rates are high, people/companies with a lot of cash can take all the profits. Buy up homes and rent them out to millennials and gen-z, who will never be able to afford home ownership.
I wonder how many 1-2 bedroom homes are being gobbled up by baby boomers. I was often out bid by boomers who were downsizing, and had all cash from a 3 to 4 bedroom home sale.
The two groups of people that want small 2 bedroom homes are new home owners and downsizing retired people. And one of those groups has a shit load of equity that they can cash in on.
You’re forgetting landlords (of all sizes)
It’s extremely common in my generation to sit on their first house to rent out as passive income, and plenty of private investment absorbing starter homes to rent as well
Boomers have been much slower to downsize compared with previous generations. Many are getting snatched up by landlords.
Perhaps. Although I lost a LOT of offers to boomers who wanted small 2 bedroom with no stairs.
My spouse and I bought our starter home (3bed 2ba 1107 sq ft) in 2017 for $130k. Now we’re trying to upgrade to bigger because we have since had a child and would like another. One bedroom is used as our office because my spouse works from home. But we have no ROOM. Our house is estimated to sell for $290k but we can only afford a mortgage on a $350k house now because of mortgage rates, even after more than doubling our income through job changes. The number of houses in our area in our price range is small, not much bigger than our starter house, and most of the time total gut jobs. We can’t go anywhere. There’s nowhere to go.
There is nowhere to go. I think that just about sums it up for people today. We have lost our freedom to not enough housing and there is no solution coming.
First, don’t share any information that you’re not comfortable with. I’m not trying to pry into your life. However, I’m not quite following this your numbers and seeing your same limits.
- 2017 house for $130k at 4% 30 year = $621/month for principal and interest
- 2024 house for $350k-$160k in current home appreciation-$3k (approx) in principal paid on current house means a mortgage on the new house of $187k at 7.5% = $1,318/month for principal and interest
So yes, your mortgage payment would be more than double what it is now, but the difference is only $5208/year more. That’s certainly not nothing, but you also said…
even after more than doubling our income through job changes.
Does doubling your income still make $5208 more of housing cost per year difficult?
By pushing up your purchase price and getting a mortgage on a $400k home ($237,000 mortgage with your current equity) would push your monthly payment up to $1,673 or an extra $12,624/year over your current mortgage and interest payment. Unless your starting salaries were pretty low to begin with, it seems like this would possibly be in reach for you.
What am I missing?
One other random thing to consider, many of us did a refi during the pandemic. Hell, my bank simply said they’d lower my interest rate if I didn’t leave and refi with another bank. Shit was bonkers during the pandemic.
All in all, they might be sub 4% or even sub 3%.
Absolutely. We refinanced to 2.8% from 3.9% but we also rolled a high interest student loan into that so we ended up saving $1000/month. We could move but unless we completely moved areas, the housing prices are going to be similar to ours but with a 6.9% interest rate.
Can you renovate your current home to get another bedroom and maybe some more common space?
You could probably get a 2nd mortgage for a project like that but if you aren’t familiar with them then you should speak to a financial advisor (one that has a fiduciary duty to you). This may allow you to keep your existing mortgage and rate on the first loan and only pay the higher rate on the 2nd.
I’m in a very similar situation, but I’m just dealing with it and being content to own a home. I keep upgrading what I can and have plans in the works to expand our space a couple of ways.
Also thinking about buying some land and building the next house when the time comes
the upper end of the real estate market has been bought up by investors from the luxury hotel market (thanks airbnb) this has resulted in a downgrade in housing for everyone but investors. It obviously takes 5-10 years for new housing to be built and in the meantime people are becoming homeless, home buyers are stuck where they live as house prices and interest rates go up.
You can fix this today by banning airbnb but its not an ideal solution and even that will take time. It will result in like boomers selling their second homes and airbnb companies selling. It won’t fix the speculation problem; we need public housing expansions to ensure the bottom of the market stays fluid which will drive house prices down if bottom tier renters have options.
People who bought a house during COVID times were really expecting to sell their house after only a few years? I wish we could have bought a house then. I’d love to be stuck in a house.
There are a lot of lemons with “starter” homes. They’re usually more likely to be older and have more problems. People buy in, realize they got fucked, then want to sell instead of losing their ass on renovations.
Since the housing supply is extremely low, people make offers with zero contingencies / no inspections. If you want to inspect the home, you need to be offering way over asking, otherwise you’re just going to be passed over for someone else’s offer.
I think a majority of this depends on the market. I have seen 4 houses sold on my street in the past 2 months. And 3 of those were in May, and the 4th was April but is being flipped I think and back on the market with a higher price (more inline with the current area - and to recoup renovation costs).
The phrase “Starter homes” no longer exists IMO. The homes that used to be starter homes are really way out priced and no longer really being built.
Instead this phrase is more along the lines of “starter condo”. Developer’s are only really building single family homes now (in north America) or large condo towers. One is for families and the other for singles/couples or investors. Most condos in a 3-4 bedroom range as well are nonexistence or priced higher then a single family home.
Things like fire codes and parking minimums are really causing this IMO. Most cities and towns are talking about the “missing middle”. These are homes placed between highrise condos and single family homes, such as four plexes, low rise developments and laneways. There are a few other examples as well.
Unfortunately developers can’t build these, not because of week demand, but because things such as parking requirements and fire code restrictions really make these developments not financially feasible for developers, plus cities can choose to shoot down any proposals or permits which adds to the cost. (Better to build whats know and tried)
A “starter home” is still a home, is still a roof over your head and a place to sleep.
And you’re not subject to the whims of some slumlord.
Owning your own home (even if it’s not “keeping up with the Jonses” compliant) is not a horrible position to be in.
Got a fixed rate 30 year mortgage and I’m paying less today for twice the space than I was paying 15 years ago when I first bought my home. I have a friend who got a relatively tiny 1400 sqft row house for $80k back in 2006 and paid less than $1k/mo in rent + utilities for nearly a decade, until she got married and needed extra space for kids.
If you’re confident you won’t be moving for the next five years, a house or condo at a fixed rate is consistently a way better deal than chasing apartment teaser rates every 12 months. But landing that kind of space means a steady income in a professional career. Its not something folks in the service sector - with irregular hours and changes in location and depressed wages - can reliably count on.
In the end, this is far more a problem of shitty unreliable working conditions than best-practices for picking a residence.
This comment is so wild to my non US eyes. I had to convert the sqft you gave because I missremembered. Friends of mine are family with two kids and live in a bit more than half that space (80m2) - and are not the exception from what I know.
To see 130m2 “too small for the family” is really weird and I’d love to see/understand where the differences come from. I guess that even how the space is calculated might have an impact. Really fascinating!
Thanks for sharing!
To see 130m2 “too small for the family” is really weird
The unit was a two story with a big chunk of the real estate eaten up by a stairwell. For one kid, it was a squeeze but manageable. But when they were expecting twins, plus juggling a little boy, they decided to upgrade to a house with a full kitchen, a backyard, and a third bedroom.
I’m sure people have gotten by on less. But when you can get a 275m^2 home for $250k out in the 'burbs and you’re a two-income family of engineers, the only thing holding you back is the commute.
