Whatever Happened to the Starter Home? (PMI, interest rate, real estate, approved)

[Tracysherm]

I was just wondering, do people believe in "starter homes" anymore? Back in the old days (like when I was a child in the 70's) young couples and first time buyers had the idea that their first home would be a starter home. It would be small and modest. They would live there several years, save money, build up some equity, and then buy a bigger house after they started having kids. Kids in my day even sometimes had to (gasp!) share a bedroom with a sibling until mom & dad could afford a bigger house.

But now every one I know who bought their first house bought big huge houses. If they have two kids, they must have at least 3-4 bedrooms. I must admit that I even bought a bigger house than I needed (and bigger than my parents' first home), though I was careful enough to make sure I could afford it.

I know there were a lot of root causes for the housing bubble, but I think that the death of the starter home was one of the big ones. Too many people began believing they were entitled to have a house as good as or better than their parents' home, when they were still only in their 20's.

I watch TV shows like "Property Virgins" and "My First Place" which follow first time buyers through the buying process, and I'm astonished by these people who insist on things like 4 bed, two + baths, at least 2,000 square feet, must have both a living room and a family room, etc. These are couples with no kids, who are just starting out in their careers. Of course they still show the ones who buy these big houses with 100% financing, but that's a whole other issue for another thread.

The funny thing is, many of these first time buyers move within a few years anyway. So it wasn't like they were getting the big house to stay in for the next 20 years.

Maybe one of the positive outcomes of the housing bust and mortgage crunch will be the rebirth of the starter home. Does anyone else agree?

[chet everett]

I don't think so.

The problem is that NEIGHBORHOODS of "starters homes" are a BAD BET, too many people NEVER "get going" and remain in "starter homes" that they cram full people and things. I saw HGTV show where some "creative" home seller turned their townhouse's one car garage into a rockin' 4th bedroom. Ugh! That does NOT help neighborhoods.

Starter homes in good neighborhoods get over-improved and then attract far more than "starter" families, driving the prices ever higher. Not great, but better than overcrowded and unattractive.

[DvlsAdvc8]

My wife and I just purchased our first home, and yep, its quite larger than we need but well within our comfortable affordability range.

I would have loved to buy a smaller "starter" home, but our searching only produced such houses in undesireable locations. More often then not they were quite old, or townhouses. That's simply not what we wanted. The entry level home at the quality, age, and location we desired steered us into a larger home than otherwise desired or necessary. I assume there just isn't enough profit in it for builders to build small homes as opposed to townhouses.

I have my doubts that the starter home will return any time soon. The younger generation, myself included, has been raised on instant gratification. Most of us don't want to "work our way up"... but rather "get what we want now". The value of doing or process is far below the value of achievement or having. I see that it isn't so much that hard work is valued as it is results. A whole generation overly focused on acheivement (thank you baby boomers) and lacking focus on effort. Its not hard to see that the person who buys a new grand house is given substantially more parental/social praise than the person who wisely buys a starter house. The former is perceived to be more successful and impressive.

Their is an unfortanate feedback loop as a result. The "starter" houses end up the houses of the "have nots" and social problems begin to fester and compound in the absence of the "will haves"... all of which just serves to make the "starter" community even less desireable. The old tradition of being young and buying a small home only to pass it on to another young couple is largely disrupted - and I doubt will ever return. More often then not, you're seeing couples wait longer to have kids, rent longer, and buy big at greater long term cost.

My wife an I aren't exactly just starting out though. We've been married for 10 years and out of college for about 7 (yes, we got married in college). We have a 2 year old daughter and are planning our second to be born around Spring 2011. Although we've bought far more house than we need (4 BR, 3.5 BA, plus study and bonus room) we were still sensible enough to keep our debt to income ratio below 30% (I think ours is 26%). Of course, we didn't have 20% to put down so we're stuck paying PMI - but I look at the PMI as a fair tradeoff against having to sell and move again and not being 100% happy about my home. We have a higher income than most couples though and are able to put a couple hundred extra toward principal each month. Thus we'll be looking to have our PMI dropped in a few years... the total cost of PMI being in the neighborhood of $10,000. I'm okay with paying that now rather than being in a home I don't really want and having to sell it and potentially move my kids to another school and pay all the costs of selling a home and moving.

Another factor in our decision was the ridiculous interest rate we got. 30 yrs @ 4.5% (builder paid closing costs). That's not a rate that will likely be around in a few years. I'd rather have that rate on the house I want to stay in a long time, than have that rate on a house I want to be out of in 5 years only to get a much higher rate on my long term house in the future.

It's a strange world I think. IMO, many of the factors in our decision were out of wack in favor of the long term home. Low rates, not requiring 20% down, poor quality of "starter" communities and overall social pressures.

If I were dictator, I'd mandate 20% down (among other dramatic tightening of lending standards), do away with the mortgage interest deduction and any other incentives that cause the inflation of home price through the "creation" of demand. I say "creation" of demand because all these weak standards and home ownership benefits only increase the incentives to own and increase the pool of potential buyers. More buyers combined with time it takes to build a house to meet demand means higher home prices in the short run driving over construction and prompting future price crashes.

More importantly, lower, more stable prices mean the average couple suddenly becomes more reasonably capable of saving that 20% downpayment on their own! Crazy financing schemes that only beget higher prices are no longer necessary. Young families are drawn to smaller homes (as they have no choice due to the lack of downpayment) and the old wisdom of buying a "starter" home is restored. The recent volatility in real estate is mostly eliminated, foreclosures are again low, and a bloated financial sector is curtailed. Finally, every homeowning family is better off in that long term interest rates are kept low due to lower foreclosure and depreciation risk - meaning they pay less over all in interest. Standard of living rises overall.

In the effort to expand home ownership with a myriad of financing schemes and flexibility, we have inadvertently made it a nightmare for many families, more costly for all families and turned the idea of a "starter" home into something less than desireable. It's quite ironic.


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Oh yeah, and those extra rooms we don't "need"... well we've figured 1 bedroom for us, 1 for my daughter, 1 for future child (1+ year out), 1 for guests/utility (not to mention potential 3rd child 3+ years out), a study for my own personal sanity (computer room really - which wasn't an issue in past generations), and lastly, a play room/movie room/den whatever you want to call it (aka bonus room). 3300 sq. ft in total. Having our kids share bedrooms honestly wasn't even thought of... I guess because neither my wife nor myself had to share a bedroom ourselves (not that we have anything against it). But anyway, there you have our thought process... being a couple who didn't buy a starter home as their first home.

[eric#1]

I agree with Tracy on this one -- obviously not everyone has overstretched themselves, but too often I see people buy with the hope they will be making more in the near future -- When I was a kid the neighborhood I lived in had a number of successful professionals living in basic 1800-2500 sq ft 3-4 bed 2 bath homes. They are all quite wealthy now, but had they went for the mansion on the hill I suspect interest would have ate up their retirement. I see young couples in commission based jobs buying over sized homes they don't need. The slightest downturn in sales for them could spell disaster. SD is fiscally a very conservative state, but the younger generation seems less likely to save as their parents before them -- people are too often unwilling to step-back in quality of life than they used to be. Young adults want to buy right now just as nice of a home as their parents had, but are unwilling to start out the way their parents did...

[MrsMo]

We lived in our "starter" home for 12 years, it was 2 BR, 1 BA, full basement, 1 car garage, large yard, good school district. When we went to sell, these young couple would come in, yuk no granite counter tops, only 1 bath? It was sad. A home we were so proud of and these youngsters would come in and practically ask how can you live like this? Yes, our kids shared a room but so did I when I was a kid. And only 1 bath, our kids weren't teens yet. The only reason we moved was we had a 3rd child and needed a 3 BR home. DD was getting older and we knew we would need a 2nd bath. Over time we had another child and all 3 boys shared a room, it was no big deal to them. (They are all now grown and very close). My son and his fiancee are looking for a home and they have said all they want to show us is these huge 4+BR homes and we don't need that! They want a nice 3BR with about 900 to 1000 sq ft of living space. The realtors don't want to show them anything like that.

[StarryEyedSurprise]

The way I see it is, I am not going to spend money on something that I know I will want to upgrade from in a few years. If I did that, I'd be sitting two hours outside of NYC in a condo that lost 25% of its value, because that "starter home" only had two bedrooms, and was well under 1000 sqft.

Now we are buying our "home we can live in till we retire, and even then, I won't mind staying here" home, for the price of that condo, except in a better area IMO. It's certainly not a McMansion, and when I am done remodeling it here and there, it will be a 3BR/2.5BTH house, where my future children will share rooms, and my guests will probably sleep on a murphy bed in the formal LR. I see buying a starter home as a place where you intend to only live for five or less years. To me, that's more of an investment - something you are living in to avoid paying rent, and can hopefully sell for more money to get a bigger home.

And we all know how well those investments are turning out to be for some. IMO, if you are going to feel cramped within a short amount of time in a home of "starter home" size, better off not buying it, at least not now.

[texdav]

Most of thopse satrter homes are thru governmant programs whose real intent is to place them in older rundown neighborhoods. Not many want to finance thyem there if they don't have to.

[Tracysherm]

Tex, I'm not talking about low cost homes through government programs. I'm talking about the idea that "regular people" (middle class & working class) used to believe in and buy starter homes, and now they don't seem to anymore.

I lived in a "starter home" as a kid, and it certainly wasn't low-income housing through some kind of government program, nor was it a run-down neighborhood.

[spiderbear]

It's sad that my husband and I are still in college and will be moving for grad/medical school in two years, because there are some amazing starter homes in our area. We almost bought last year, a 3brm/2ba, 1100 sqft home on .62 acres fenced in a safe neighborhood near the university. It was about 15 years old, needed an interior paint job, but for the most part was a very nice, reasonably priced house. Our mortgage would have been cheaper than our rent now. Unfortunately, with this market, we were too afraid to lose money on it or be stuck paying a mortgage/dealing with renters if we couldn't sell.

I think the problem is that people get approved for way too much. My husband and I, two college students, both working part time, got approved for $150,000. How realistic is that? We told them they could take $50k off and we'd be happy. And the house we loved sold for $20k less than we were going to offer...so I'm truly glad we held out. When we finally do buy, both of us want a nice, small starter home. I just want less to clean!

[janetvj]

I bought a starter home after my divorce 16 years ago when my 3 kids were still at home and I'm still in it. I seriously thought about buying a bigger home a few years ago, once my income had gone up. And then I realized that I didn't need nor did I want bigger; what I really wanted was to retire. So I developed a financial plan, worked to get rid of my debt, and retired last month. And if and when I ever sell my little starter home, it will be to downsize - to go from a 3 level townhouse to a 1 level ranch (hopefully in a warmer climate). I do not subscribe to the bigger is better theory. I don't want to be a slave to my house. Bigger means more expensive, not just to buy but to heat and cool, and more time-consuming to clean. I see some of my friends' homes, and they have rooms that they don't even use. That's silly, and wasteful. I can be happy with less.