Is a starter home necessary today? Maybe not, but that doesn’t mean starting small when buying your first home isn’t a good idea. Is skipping the starter home the right strategy for today?
The truth, though, is that many first-time buyers are skipping the starter home. The traditional view of homebuying has always gone like this: You first buy a smaller, less expensive starter home. You build equity in that home by making mortgage payments.
After a number of years, maybe five or seven, you sell. You take the profits from your sale and invest them in a larger, longer-term home, taking out the larger mortgage loan needed to finance that purchase.
But is jumping ahead to that longer-term home first a bad move? Not necessarily, according to mortgage lenders and real estate professionals. It all depends on whether you can comfortably afford a larger home or whether you can find a smaller residence that will make you happy while not squeezing your family too severely.
Skipping the starter home
Bank of America recently published its 2018 Homebuyer Insights Report. According to its findings, most first-time buyers say they want to skip starter homes and instead shop for a long-term residence.
The report found that 75 percent of first-time buyers would prefer to bypass a starter home and instead purchase a home that will meet their future needs, even if that means holding off on buying until they can save more money.
This isn’t surprising. Homes are more expensive today, even starter homes. At the same time, mortgage rates are still at historic lows. Buyers, then, might want to pay a bit more for larger homes because borrowing mortgage dollars isn’t quite as expensive as it once was.
Other borrowers might decide to wait until they’ve saved up more money or have a higher income stream before buying their first home. This way, they don’t have to move as many times or go through the home-selling and -buying processes as often.
Doing the research
Michael Hausam, a real estate agent and mortgage broker with the Hausam Group at Shore Capital in Irvine, California, said that buyers almost always have to sacrifice something when buying a home, whether they are purchasing a smaller starter home or a larger long-term residence.
The key to happiness lies in sacrificing those amenities and features that you can live without while buying a home that includes those features that you absolutely must have. For some buyers, this might mean buying a home in which their children have to share a bedroom as long as this sacrifice means that they can live in a high-quality school district. For others, it might mean sacrificing a sprawling master bedroom as long as their home comes with a large backyard.
Then there’s the fact that the home you buy today doesn’t have to retain its current layout forever. Even if you only have the budget for a smaller starter home today, you can always add onto that home in the future as your family, and income, grows.
Just remember, home renovations are both expensive and aggravating. It’s no fun having work crews tearing up your kitchen every day.
Changing financial situations
It might make sense, then, for buyers to hold off on owning a home if they expect that their financial situations will improve in the near future, Hausam said. This way, they can buy a larger home for their first residence and skip over the starter home phase, as long as they are patient and willing to rent until their incomes rise.
Maybe a buyer expects to obtain a college degree that will increase his or her earning potential, Hausam said. Maybe another buyer expects a promotion in the near future. Holding off on the starter home and buying a larger residence once their income boost kicks in could be the smart move for these buyers, Hausam said.
The key is to think about both affordability and the type of home you want. If you're crammed into a home that's too small for your family, you won't be happy. At the same time, you won't enjoy that larger home if you struggle to make the mortgage payments each month.
"Given that, my advice is always the same, buy a home that you can really enjoy and like, planning on spending as much as you can comfortably afford," Hausam said. "Do not put yourself in a situation where you will be unhappy with the home or financial pressure will become burdensome."
The benefits of a starter home
There are benefits to buying a starter home. Nick Bush, a real estate agent with Tower Hill Realty in Bethesda, Maryland, said that homes are expensive in the Washington D.C. area where he works. Starter homes offer first-time buyers a more affordable option to stop renting and begin owning.
First-time buyers can then build equity in their homes as they make monthly mortgage payments. The value of their homes might rise, too, though this is never guaranteed. Then, when they sell these homes, they can use the profit from the starter home to help them get into a bigger, longer-term residence in the area.
That's how starter homes are supposed to work.
The biggest challenge for many buyers continues to be coming up with the down payment money required to buy any house, even a starter home. Bush, though, said that there are plenty of low down payment options available to buyers today, including FHA loans that often require down payments of 3.5 percent of a home's purchase price and Fannie Mae-backed loans that require down payments of just 3 percent.
These low down payment options along with the smaller price tags of starter homes offer buyers an easier path to owning a home, Bush said.
"In this case, you can buy a home and start building equity," Bush said.
An antiquated idea?
Other real estate professionals say that the entire starter home idea has become antiquated. Count Michael Kelczewski, a real estate agent with the Wilmington, Delaware, office of Brandywine Fine Properties Sotheby's International Realty, as one.
Kelczewski has a unique perspective on this question: He's a Millennial himself. He understands, then, why so many buyers in his age group are skipping the starter home.
Housing is costly today, with even starter homes carrying big price tags in many markets. First-time buyers, then, often choose to save their dollars until they can afford a larger, nicer first home.
"Many forego the homebuying experience until later life stages," he said. "School debts and delayed life milestones decrease the necessity for permanent housing. As housing costs increase, compounded by limited inventory, the notion of a starter home becomes arcane."
David Reiss, professor of law and research director for the Center of Urban Business Entrepreneurship at Brooklyn Law School in Brooklyn, New York, said that it is possible to overthink this decision.
Ideally, consumers will consider both how much house they need now and in the near future as well as how much they can afford in the present day. Keeping these two factors in mind, buyers will be better poised to find a home that’s not too small and doesn’t break their budget, Reiss said.
"You want to make sure you are not unnecessarily constraining yourself with too small a house for your needs or overly burdening yourself with too expensive of one for your budget," he said.