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Bidding wars may be cooling and mortgage rates could dip below 6% next year. But the shortage of "starter homes" — smaller, more affordable houses — continues to lock many would-be first-time buyers out of the market.
Gabriel Veasey, a reader in Central Texas, has children who live near Austin, Texas. They've been hunting for their first home but can't find anything affordable. He asked:
Why can't they have the opportunity to buy the starter homes – the two bedroom, $200,000 [home] that's just what they need, instead of a three [bed], two [bath] or four [bed], three [bath] home for $400,000 to $500,000 that's just not within their range? … Where can my kids go? Why can't they have that opportunity to find a starter home?
The housing market in Austin mirrors what's happening across the country
The math doesn't work in their favor. The median income in Austin is about $134,000 — enough for a mortgage of roughly $350,000. But in September, the median home price in Austin was about $560,000, according to Zillow. "If you're a median income earner in the region, you can't afford to buy a house in the city of Austin," says local builder Scott Turner.
Although it has slowed somewhat in recent years, Austin remains among the fastest-growing metros in the country and home prices have reflected that boomtown energy. But the city's housing crunch mirrors a national trend, says Mike Loftin, the CEO of Homewise, a New Mexico-based organization committed to helping first-time homebuyers. He points to Albuquerque, the largest city in his state, as an example.
"Ten years ago in Albuquerque, between 2014 and 18, about 20% of all new homes built in Albuquerque would be considered an entry-level home, a smaller, more affordable home. Today, that number is 4%," Loftin says. "And this is true across the country. Home builders are not building that entry-level home."
Supply and local regulations both play a role
For decades, construction of these smaller homes has been falling across the country. In the 1980s, they represented about 40% of the market, but by 2023, that percentage had dropped to just 12%.
Turner says the rising cost of materials is one big reason builders are shying away from the affordable end of the market, where the profit margins are lower. "A home that maybe used to cost $300,000 to build now costs about $450,000," he says, citing a 40% increase in construction materials since about 2020. The added costs from tariffs on Canadian lumber and other construction materials are expected to tack on another 7% to 10% to building costs, he says.
What's more, many people who bought or refinanced during the COVID-19 pandemic are reluctant to give up low mortgage rates — as low as 3% — to move up into a house they would have to buy at closer to 6%. As a result, those starter homes aren't being recycled for a new generation of first-time buyers.
Going back to Gabriel: The problems for his kids in Austin largely are zoning and red tape. Until two years ago, much of Austin was zoned exclusively for single-family homes, and once had one of the largest minimum lot sizes in the state, Turner says. Now, property owners can build up to three homes on what used to be a single-family lot, making room for more entry-level homes. But the biggest barrier to creating affordable housing remains the city's slow and expensive approval process for the construction of townhomes, condos, and new subdivisions, which can take up to two years regardless of the size of the project, he says.
Turner points to Houston as a model of how to get more starter homes built — through deregulation. "Back in the 90s, Houston started to allow very small lots … throughout its urban core and to this day, you can still go down to Houston and live in the middle of town, and still find a townhome for $400,000."
To be sure, some existing homeowners haven't embraced zoning changes that promote new construction. Among other things, they argue that without formal zoning, industrial, commercial and residential uses would come into undesirably close proximity. In Austin, for instance, they have in the past successfully sued to block such changes.
Market shifts and local initiatives could help new homebuyers out
Assuming that mortgage rates do come down, there will likely be some movement in this lower end of the market, Loftin says. Being ready when the market changes is key, and he says that Community Development Financial Institutions (CDFIs) such as his — and there are many across the country — can help.
"We do the assessment, then we do an action plan to address the barriers that you have," he says. "What's the game plan for improving your credit? It's not rocket science. It's helpful because we know the system."
"Building a savings habit where you just have your employer just automatically deposit something, every paycheck into your savings account is super, super helpful," he adds. And prospective buyers don't have to put down a large amount of money, either. "Our typical down payment from a home buyer is about 2% of the purchase price, and that includes the closing costs."
Housing advocates have proposed initiatives aimed at increasing the number of starter homes built, though even if approved, they could take years to make a dent in the problem. There's no national plan, but states are trying out different approaches. Last year, Utah's Republican-dominated legislature passed a bill to provide $300 million in subsidized loans for builders and new city zoning tools in an effort to boost the construction of smaller, no-frills housing.
Homewise has also proposed "New Homes for New Mexico," to provide around $30,000 in direct assistance to potential homebuyers that could lower the purchase price and encourage the construction of more homes in the $300,000 range. Loftin says for builders, the subsidy means "more buyers that can afford that home now, even with the interest rates we have today." New Mexico's legislature plans to take up the measure in January, Loftin says, adding that it "appears to be gaining significant support."
But in the meantime, starter homes can still be accessible
Meanwhile, even without such measures, there are things that you can do to maximize your chances of finding a starter home that fits your budget — but those options do come with compromises.
Harrison Beacher, a realtor in the Washington, D.C.-area, says he tells clients to look at home buying as a Venn diagram comparing what you want with what you can afford, where you want to live and other must-haves.
"Too many people wait for the 'dream home,' when what really changes their long-term financial story is simply getting started and making thoughtful, strategic moves over time," Beacher says.
"A true starter home is not about checking every box on your wish list. It is about identifying the right combination of location, affordability, and potential for appreciation," he says. "You want to be close enough to the things that matter for your lifestyle and career, while staying within a price point that allows you to grow into your home instead of being stretched by it."
Finding that perfect entry-level home might involve something realtors refer to as "driving until you qualify," Turner says. In other words, if you can't find something affordable, keep looking further from the city until you can.
The median home price in Austin may be way too high, but the city of Bastrop, about 30 miles southeast of Austin, is much more affordable, he says. He says the median price of a home in Bastrop in July was $336,000, about 40% lower than Austin.
And for Gabriel's kids, it might make sense to look outside Austin, where homes are more affordable, and buy something now — even if it's not their dream home. Over time, they can build equity and use it to move closer to the city and what they really want.
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