As many first time buyers have probably figured out, buying your first home has been anything but easy. While it has been quite the sellers market, what with the uptick in demand, buyers have been having a hard time settling down in their first home. The reason for this is a combined effect of higher demand, lower supply of starter homes and slow construction.
Owen’s real estate agent warned the 28-year-old that she would face stiff competition in the market for entry-level homes—and he wasn’t kidding.
Owen had to offer $215,000 for a property listed at $198,000 to fend off at least nine other bidders for the 1,200-square-foot home in the sought-after neighborhood of Wells Branch.
“I definitely spent a lot more than I thought I was going to spend,” Owen said.
Similar scenarios are playing out across the United States. Low interest rates and an improving job market have created a wave of prospective first-time home buyers, but they’re being stymied by a dearth of available starter homes.
Nationwide, the inventory of homes costing $250,000 or less fell more than 12% between June 2015 and June 2016, according to the National Association of Realtors.
The shortage stems from higher labor, land and building permit costs that have caused construction companies to focus on higher-end homes that bring more profit. In addition, institutional investors are snapping up affordable homes by the thousands in select markets nationwide and converting them to rentals.
The shrinking supply of affordable homes is one economic trend among many that is conspiring against younger workers and families in building wealth as their parents once did.
Real average hourly wages of often debt-laden college graduates fell between 2000 and 2014, according to the Economic Policy Institute, while the Case-Shiller U.S. National Home Price Index jumped more than 25%, adjusted for inflation, over the same period.
Younger workers who can afford to save for a down payment, meanwhile, are forced into bidding wars for the dwindling number of houses they can afford. Some decide instead to strain their budgets for a home that would have been traditionally considered a trade-up.
Over the past four years, the number of entry-level homes for sale – defined as those priced in the lower third of a local market—has fallen by 34%, according to a Reuters analysis of data compiled by listings firm Trulia.
The market is even tighter in many cities. In Salt Lake City the average number of starter homes on the market has fallen by 83% since 2012, and in San Diego by 71.5%. Cambridge, Mass. and Portland Ore. have both seen drops of more than 60%.
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