With fewer homes on the market, does the starter still make sense?

nice starter home backyard

Typically, a first time home buyer chooses a smaller, modest house or condo to begin building equity. After a few years and as their family grows, the homeowner cashes in on that equity and puts their home up for sale, using the proceeds as a down payment on a bigger, better home. At least, that’s always been the traditional timeline of events for your average American home buyer. But today, things are a little different. National home equity took an enormous hit during the Great Recession and some homeowners are still struggling to regain their lost home value. This led to fewer existing homes coming into the market, particularly the so-called starter home. Now, as low real estate inventory continues to slow the U.S. housing market, more and more first time buyers are questioning whether or not the starter home still makes sense.

While much of the nation’s housing market appears to be rebounding, the number of existing homes for sale in the lower price point is less than favorable. If you’re a prospective first time buyer in today’s marketplace, you’ll likely have far fewer options for starter homes than your parents’ generation. Likewise, the homes that are available are likely to attract several interested buyers and multiple competitive offers. These conditions lead many a first time buyer, not surprisingly, to consider alternatives to the traditional starter home.

For some first time buyers, skipping the starter home step altogether and going right for the forever home seems more sensible. This could be especially appealing to younger couples who plan to have children in the near future, or those who simply want to avoid the pitfalls of searching for a starter home in today’s market. Here are a few pros and cons to “buying up” on your first real estate transaction:

Pros

  • More inventory to choose from. Currently, starter homes and homes in the lower price points are harder to find. Larger homes are more readily available.
  • Possibly less competition from other buyers. Since starter homes are in demand, they’ll likely sell fast. You’ll  probably need to have a preapproval letter and competitive offer ready if you’re buying a starter home.
  • Ability to grow in the home.  Getting a bigger house first is kind of like buying shoes a half size bigger for you kids – they don’t need the extra space right away, but you know they’ll grow into them very soon. Buying the forever home first helps you avoid the need to move when your family gets bigger or you need more space.

Cons

  • Higher cost, which could mean needing to take more time to save up, having to make a larger down payment, higher closing costs/fees, etc.
  • What if you change your mind? If you have to move unexpectedly in the near future, it may be more difficult to sell your home, or you may have to sell it for less than you want (right now larger homes are in less demand than small, starter homes).
  • Higher risk of living beyond your means. The draw of having your forever home first may tempt you to look at homes that are more than you can realistically afford. One of the key points of homeownership is to build wealth over time; you may not be able to do this as easily if you’re struggling to make your mortgage payments each month.

Who Should Consider Buying Their “Forever” Home First?

Buying a bigger home could make more sense if one or more of these statements applies to you:

  • You expect your household to grow in the next 3 years or so (having children, taking in an elderly relative, adult children moving back in with you, etc.).
  • You plan on starting your own business or cottage industry out of your home and will need space for inventory, supplies, general storage, a home office, etc.
  • You don’t expect any major job changes or things that could force you to relocate in the next several years.
  • You can realistically afford to buy a larger home (i.e. make a larger down payment) or you can qualify for an affordable low money down mortgage (and still comfortably afford the monthly payments and other fees). Talk to a qualified mortgage professional to see how much you may be qualified to borrow but remember – it is not wise to borrow the full amount for which you’re approved.

Who Should NOT Consider Buying Their “Forever” Home First?

If one or more of these statements applies to you, it may be better to stick with a starter home first.

  • You’re active duty military, or in a profession that is likely to require you to relocate frequently.
  • You’re not confident in your ability to comfortably afford the higher costs associated with a bigger home.
  • You do not plan on expanding your household any time soon.
  • You don’t expect your storage needs to drastically increase any time soon.
  • You want to use the cash from the sale of your first home for the down payment on your next home.

Keep in mind, there are other alternatives to buying a starter home besides going right for the forever home. Here are a few more options to consider:

  • Investment property. Some first time buyers are choosing to buy a rental home (either long term or vacation/short term rental) before they buy their first primary residence. The draw to this being a way to build wealth/equity while also possibly increasing monthly cash flow. Plus, if you’re buying a home in a popular vacation destination, you and your family can enjoy it when it’s not occupied by renters.Once you’ve built up enough equity or saved enough cash, you can either sell the rental to help fund the purchase of a forever home, or you can hang onto it as a long term investment and use it as a retirement home in the future.
  • Building a home. If you’re not seeing something you like in the current market’s inventory, consider buying some land and building a home. We should note, this doesn’t have to mean buying a lot in one of those HOA-governed, master planned communities and choosing from one of their preferred floor plans. If you’re willing to look beyond the city limits of your market, you may be able to find some reasonably priced land for sale that isn’t within a master planned community, where you can be free to build a large or modest home (or even a tiny home!) to your specifications.

 

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