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Builders Cutting Down on Starter Homes

Millennials are starting to move into the housing market, but with inventory dwindling they may be out of luck. The solution? Newly built homes.

"Since the recovery has really been at the middle end of the market, home prices have gone up and land prices have followed," said Megan McGrath, managing director at MKM Partners on CNBC. "So it is very, very hard to make a good profit at a lower price point these days."

Diana Olick on CNBC noted that following the recession, many investors bought thousands of foreclosure properties, and when prices improved, they chose to hold onto them and rent them rather than sell in the better climate. This led to the reduced amount of starter homes today.

In March, the median price for a new home was $315,000 while existing homes had a median price of $236,000, due to builders focusing more heavily on moving-up buyers rather than new buyers. Additionally, younger millennial buyers were kept out of the market by lack of employment and wage growth along with high student debt.

"I don't think anyone's doing jumping jacks in terms of that lower end of the market, but I do think you're also seeing ... a little slowdown at that middle end, because that's where the bulk of the recovery has been so far. And so we've seen a lot of sales so far in the last four years in that middle end, so you need to find another avenue of growth," said McGrath.

Home builders are starting to lower prices, but very few are building what can be called “starter homes.” CNBC notes that only homebuilders D.R. Horton and LGI Homes, have substantial entry-level product.

"Finally they are selling well, so you are seeing everybody start to migrate to those types of homes, but they're starting," said John Burns, CEO of John Burns Real Estate Consulting. "People are doing more townhomes in good locations, and they're also stripping stuff out of the house to get the price cheaper."

Though millennials are often first time buyers, it does not necessarily mean they are starter home buyers.

“Millennials waited longer to get married, have children and buy homes, due to the recession and other social factors,” said Olick on CNBC. “Since they are older, they can afford more, even though it may be their first home.”

About Author: Seth Welborn


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