Starter homes, once essential stepping stones for Americans entering the real estate market, are becoming increasingly elusive. As the 2025 buying season approaches this spring, first-time homebuyers face a daunting challenge in finding adequate starter homes. Traditionally defined as homes under 1,400 square feet, these properties have significantly dwindled in availability. Experts attribute this trend to various factors, including rising construction costs, industry consolidation, and shifting market dynamics.
In 1982, starter homes made up 40% of new constructions, providing a tangible opportunity for young buyers. Comparatively, in 2023, only 9% of new homes built in the United States were under 1,400 square feet, according to Census Bureau data. This decline stems partly from the consolidation of the homebuilder industry following the 2007-2008 global financial crisis. Many builders prioritize larger, more profitable projects, echoing the sentiment of Sam Khater, chief economist at Freddie Mac, who noted that "many builders are not leaving money on the table."
The cost landscape has also shifted dramatically. Selma Hepp, chief economist at CoreLogic, highlighted that while labor and material costs have risen about 50% over the past decade, land costs have increased two and a half times that rate. Consequently, prices continue to climb across most parts of the country, with mortgage rates hovering near 7%. The S&P CoreLogic Case-Shiller U.S. National Home Price Index reports a staggering nationwide home price increase of over 52% from January 2020 to October 2024.
The impact of these changes is evident in the demographics of first-time homebuyers. In 1981, the average age of a first-time buyer was 29, according to the National Association of Realtors (NAR). However, in 2024's unusual market conditions, this age has risen to an all-time high of 38. Jessica Lautz, deputy chief economist at NAR, remarked on the peculiarity of the current market: "It is such an unusual market because we have an all-time low of first-time home buyers, but an all-time high of all-cash buyers."
The annual rate of new home construction remains well below levels seen in the early 2000s and years prior. This decline poses a significant challenge for approximately 3 million potential first-time buyers in the U.S., who must navigate a market that increasingly favors seasoned investors and cash buyers over those seeking their first home.