Now Is Not the Best Time to Buy a Starter Home.

When it comes to the housing market in the United States, there is a widening gap between conventional wisdom and real estate reality. Take, for example, so-called “starter homes.”

In postwar suburban America, the term was used to describe small houses that young people could afford to purchase and live in while they established their lives—and their families—before purchasing and settling in a larger location.

There are many people who believe that “starter homes” as they were originally intended still exist. But for many potential homebuyers in 2023, that’s fantasy rather than reality in most parts of the country. In fact, a new report from Realtor.com found that renting a starter home is cheaper than buying one in all but three major U.S. metropolitan areas. Here’s what you need to know.

Why traditional “starter homes” are expensive and in short supply

Many people believe that compact one- and two-bedroom homes are still affordable for those early in their careers, but they are no longer the affordable option they once were. There are several reasons for this.

Firstly, this is a question of financing. According to Bankrate, mortgage rates are currently higher than they have been in the last 22 years. This alone makes purchasing a home difficult, but having to compete with other buyers who may be paying cash is even worse.

According to a Redfin tweet dated July 28, 2023, in May, 37% of U.S. starter homes were purchased with cash. “This is partly because real estate investors are snapping up a significant portion of today’s available homes,” the tweet said. So, as an article from The Ascent points out, this means first-time homebuyers have to compete with deep-pocketed investors looking for homes to rent or sell.

And while there is clearly a demand for these smaller, more affordable homes, they are in short supply. According to the National Association of Realtors (NAR), total housing inventory was down 13.6% in July 2023 compared to the previous year.

“There simply aren’t enough homes for sale,” NAR chief economist Lawrence Yun said in a statement . “The market could easily absorb a doubling of inventory.”

And we’re unlikely to see housing costs go down anytime soon. NAR expects home prices to rise 2.6% in 2024, and Zillow predicts home values ​​will rise 4.9% over the next year.