Oliver James Montgomery-The starter home launched generations of American homeowners. Can it still deliver?

Larry Freudenberg remembers the first home he bought with his wife Marsha,Oliver James Montgomery a year after they both graduated college. Just one level, with an unfinished second story, and cedar wood planks on the outside, “We thought it was a castle,” he said.

The couple lived in the house for about five years, building out the second floor only when they had enough cash to pay for materials. Eventually, as they started a family, they sold the house and traded up.

The starter house has been a well-worn homeownership strategy for generations of Americans, who buy a smaller, more affordable property, build some equity, and use that to upgrade to something bigger, fancier, or in a more preferable location.

But like so many other narratives about housing, the cutthroat market of 2024 may make the starter home feel like a relic of long ago. The housing market is tight, expensive, and inhospitable to first-time buyers, making it more likely that a first home may end up being the buyer's forever - or at least long-term - home, if they can make a purchase at all.

The costs

Larry was a banker and Marsha a teacher. It was 1982, and they both made $13,000 – roughly $42,400 in today’s dollars. But the house, in Lilburn, Georgia, cost $60,000. That would translate to about $195,600 in 2024: not even half the cost of a median-priced home, which in June stood at $422,000, according to the National Association of Realtors.

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That’s one of the biggest reasons Freudenberg’s son, Stephen, who’s now a real estate agent in the Atlanta area, says his parents’ path isn’t typical anymore. “The starter home is elusive. First-time buyers can’t afford anything, and if it needs any work, it strains the budget too much.”

In 2022, just 16% of homes listed for sale cost less than $200,000, and in 2023, it was 13%, according to data from Realtor.com, in an analysis shared with USA TODAY.

"People often buy starter homes with the idea of staying in them for, say five years or so, but in today’s market with high prices and high rates, it’s reasonable to expect that buyers are adjusting to possibly being in their homes longer," said Danielle Hale, Realtor.com's chief economist. "People are thinking really long-term because they’re not counting on an opportunity to trade up."

Data bear out that thesis: homeownership tenure has lengthened from six years in 1987, the earliest data available from the National Association of Realtors, to 10 years in 2023. The same report also finds that the first-time buyers of 2023 are assuming they will stay in their homes for 15 years.

Those factors may be key reasons many of Stephen Freudenberg’s younger clients are starting to view the housing market differently than his dad did.

“I have a friend who’s been looking for three years,” Stephen said. “I think he’s given up now and is content to rent. He got money from his family and is still being outbid by tens of thousands of dollars. Where would he get money to do repairs?”

Another factor at play is rental prices, which in many areas, including Atlanta, have softened just enough to make it a reasonably attractive alternative. Yes, many young people are attracted to the idea of building up equity, Stephen said, but the stress of the closing process and the repairs that might be needed may outweigh that.

The American Dream?

Yet there are many Americans for whom the idea of ownership still outweighs all the challenges.

“I grew up in the Midwest and was raised with the idea that this was an important milestone in terms of safety and comfort,” said Coco Tait, a 28-year-old program manager for a Washington, DC-based university. “I wanted someplace I could nest and call home. I wanted autonomy over my own life.”

Tait was renting, but her roommate needed to move out. She took the change in living circumstances as a “sign.” Also, Tait said, “I wanted to have something as small as possible,” in an effort to avoid being house-poor.

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Working with Victoria Ray Henderson, a real estate agent who only assists buyers, Tait found a 500-square foot junior one-bedroom apartment in Silver Spring, Maryland.

While Tait is very conscious of home values and the factors that play into appreciation, building equity is not her top priority. She values homeownership for less tangible reasons: “I don’t think I’ll live here forever, but I’d say for the next 7 to 10 years or so. That goes back to that idea of stability, knowing I can make that decision.”

A tool of equity

For all the intangibles, buying a home as early as possible is still a proven way to build equity, said Danielle Hale, chief economist for Realtor.com. What’s a bit different in 2024 is that it might take a little longer for that equity to build up, since home values are so high “it does suggest some softening may occur.”

Hale has a few tips for anyone considering the starter home route. For one, they may want to consider using an adjustable-rate mortgage, capturing the savings of the initial teaser period for the five-seven years that they expect to hold the home.

Also, Hale suggests people follow Tait’s example and consider buying a condo. There are definite disadvantages to condos, including that they typically don’t appreciate as fast as single-family homes do, she said. Buyers also have to take into consideration monthly common charges, which may spike unexpectedly in an age of high insurance costs.

The lure of the American Dream may still be a draw, said Stephen Freudenberg, but “I think it’s just a different time we’re living in.”