Once upon a time, the starter home was that charming yet modest haven where young families and first-time buyers could dip their toes into the real estate market. It was small, humble, and most importantly, affordable. These days, however, the so-called “starter home” has taken on a new, flamboyant persona, one dripping in opulence and worth at least $1 million in 237 cities across the United States. This is the highest number ever recorded, according to recent findings by Zillow.
Now, before you run off to clutch your wallet, let’s break this down. Zillow defines a starter home as one that falls into the lowest third of home values in a particular region. Nationwide, that starter home is pegged at around $196,611, a figure deemed “comfortably affordable” for a median-income household. But hold onto your spreadsheets, because here’s a stat that might make you spill your coffee: starter home values have surged by 54.1% over the past five years. For comparison, the average U.S. home has only gone up by 49.1% in the same time frame. It seems like starter homes have been hitting the gym and bulking up faster than their more established counterparts.
Half of all U.S. states boast at least one city where the typical starter home will set you back at least $1 million. And if you had to guess where the lion’s share of these pricey starter homes are, you’d be spot on if you guessed California. The Golden State is home to 117 cities where a starter home costs buyers a cool million. Anyone dreaming of owning a piece of California dreamin’ real estate might want to recalibrate those aspirations—or at least their budgets.
The skyrocketing prices can be attributed to a cocktail of factors. For one, years of underbuilding have created a housing shortage. Add to that the steep rise in mortgage rates and ballooning construction costs, and it’s no surprise that affordability has taken a backseat. Higher mortgage rates, in particular, have produced what experts call a “Golden handcuff” effect. Homeowners who locked in record-low mortgage rates of 3% or less during the pandemic are clinging to their homes like they’re made of gold, further limiting the supply available for eager buyers. With the average rate on a 30-year loan inching up to 6.78%, it’s clear that the era of low rates is behind us. Investors are predicting just one or two rate reductions this year, which is unlikely to bring back the pandemic-era lows.
Interestingly, a Zillow survey revealed that most homeowners would be nearly twice as willing to sell their homes if their mortgage rate were 5% or higher. But for now, many are staying put, creating a stagnant market that leaves potential buyers with fewer options and higher price tags. The landscape of the starter home has changed dramatically, morphing from the affordable abode of yesteryear into a modern-day real estate unicorn. So while the dream of owning a starter home is still alive, it’s become a lot more elusive—and a whole lot more expensive.
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