Is the ‘Starter Home’ Over? For Millennials, It Never Even Existed

For generations, the starter home—an entry-level property like a smaller condo, townhouse or single-family home acquired by a first-time buyer—was thought of as the gateway to home ownership.

The pros: Affordability, of course. Also, the chance to get a jump start on building equity. The cons: The starter home tended to have smaller square footage and far fewer bells and whistles.

Still, its design was rooted in potential—the potential to settle down, build wealth and, ultimately, upgrade. (Cue the visions of aspirational dream homes.)

So when did the concept start to fade from our lexicon? Has the starter home gone the way of the Dodo, or the pension check, particularly for millennials, an age group that would typically be entering a life stage primed for home buying? According to Clare Trapasso, deputy editor at Realtor.com, it’s not a lack of interest that’s killing the starter home, it’s a lack of inventory that’s the main culprit.

“It’s difficult for many first-time buyers to save up for a down payment and to afford their first homes,” Trapasso says. “Fast-rising, record-high home prices and higher mortgage interest rates are only exacerbating the problem, and since starter homes tend to be cheaper, there is much more competition for them.”

In other words, millennials and first-time home buyers aren’t the only ones vying for smaller, more affordable houses we’d typically consider starter homes. (A Harvard analysis found that investors accounted for 28 percent of single-family home sales in the first three months of 2022.) Add to that the current high costs for materials, labor and land—for builders still grappling with pandemic-related shortages, starter homes simply don’t make a lot of financial sense for them to build at this time, which limits availability and is another factor taking millennials out of the running.

Instead, millennials—but also members of Gen Z who are first-time home buyers—have become less focused on the ideals tied to a starter home and more on owning any home at all. “They’re striving to get any home they can that meets their basic needs,” says Trapasso. “Over the last two-plus years, it’s been very difficult just to get an offer accepted. That often requires compromising on things like location, size, amenities and even the condition of their new home.” (The goals are different, but the outcome is the same as the starter home concept.)

Bottom line: For those still interested in home ownership, it’s about finding a jumping off point.

Inventory is an issue, but the ideals originally tied to a starter home are also in flux, mainly the fact that values, especially for millennials, are a-changing.

Priya Malani, founder and CEO of Stash Wealth, a financial planning firm for young professionals, explains: “Back in the good old days, meaning pre-COVID, our jobs were typically tied to a physical location. That meant that it made sense to settle down and build equity in the roof over our head. But with more and more companies adopting remote policies, millennials are choosing flexibility over a fixed living situation.”

Let’s put it this way: Why wouldn’t you choose to work from Spain for six months and then Vancouver for the next six if you could? For parents, school is a factor, but WFH policies have led would-be home buyers to lean into an a la carte lifestyle vs. committing themselves to a singular zip code.

That also applies to the expectation that home values will only go up. “Typically, homes do increase in value over time,” says Trapasso. “In fact, it’s one way that many Americans have catapulted themselves into the middle-class and built wealth that can be passed down to future generations. But there are no guarantees that homes will be worth more in a few years than they are today since housing markets are cyclical. Sometimes they’re up, sometimes they’re down. Historically, those who hunker down and don’t put their homes on the market during a downturn will come out ahead, particularly ones with strong local economies.”

Rising mortgage interest rates are making it even more expensive for many buyers—millennials included—to purchase a home, starter or not. But this has led to something of a housing market correction. “More homes are now for sale. Bidding wars are dying down in much of the country. In some markets, buyers are even snagging homes for at or under the list prices,” Trapasso says. Buyers also don’t have to waive as many contingencies to get a home under contract and more sellers are cutting their asking prices. This should give buyers more hope, she adds.

As for the starter home, its potential—and availability—is certainly shifting. But is it permanently out of reach for the first-time millennial home buyer? As inventory rebounds, not necessarily.

Malani says what’s more important is for millennials to examine their goals when it comes to a real estate investment. “There has been a huge trend of millennials purchasing homes as an ‘investment,’ but that’s not the best intention behind buying a starter home,” she says. “If you’re buying a home because you love it, are comfortable with the realities of home maintenance and are OK to stay put for a while, go forth.”