As recently as the 1990s when Jason Nageli started, the homebuilding industry was still building what real estate advertisements would brilliantly call the “starting house.” In the Denver area, he sold newly built two-story homes with three bedrooms on 1,400 square feet or less.
The price: $99,000 to $125,000, or about $200,000 in today’s dollars.
This house would be in high demand today. But few builders still build something like this. And neither could you buy those Denver-area homes built 25 years ago at an entry-level price today. They go for $500,000.
The disappearance of this affordable housing is at the heart of the housing crisis in the United States. The country suffers from a growing housing shortage. But, more specifically, there are not enough of these dwellings: small, no-frills houses that would give a newly arrived family or a young couple in debt a foothold to build up capital.
The affordable part of the market has been squeezed from all sides. Land costs have risen sharply in booming parts of the country. Building materials and government fees became more expensive. And communities nationwide are far more prescriptive today than they were decades ago about what housing should look like and how big it should be. Some vinyl siding prohibits. Others require two-car garages. Almost all of them make it difficult to build the type of home that might sell for $200,000 today.
“It’s just become where you can’t hit that number anymore,” said Nageli, now chief operating officer for Utah-based builder Holmes Homes.
Throughout the country, the small detached house has practically disappeared from new construction. Only about 8% of new single-family homes today are 1,400 square feet or less. In the 1940s, according to CoreLogic, almost 70% of new homes were that small.
At the root is the mathematical problem of putting – or keeping – a cheap house on increasingly expensive land.
“When we started about 20 years ago, we could buy land for $10,000 to $15,000 and we could build a house for less than $100,000,” said Mary Lawler, director of Avenue Community. Development Corp. in Houston, a nonprofit promoter. . “It was a totally different world than the one we are in today.”
In Portland, Oregon, a lot can cost $100,000. Permits add $40,000 to $50,000. Removal of a 36-inch-diameter tree costs an additional $16,000.
“You basically regulated me on anything remotely affordable,” said Justin Wood, the owner of Fish Construction NW.
In Savannah, Georgia, Jerry Konter began building three-bed, two-bath, 1,350-square-foot homes in 1977 for $36,500. But it moved upmarket as costs and design mandates pushed it.
“It’s not that I don’t want to build entry-level homes,” said Konter, president of the National Association of Home Builders. “It’s that I can’t produce one that I can make a profit on and sell to this potential buyer.”
This reality conflicts with demographics. The typical American household has shrunk in size for decades, even as the typical house has grown in size. The downsizing of baby boomers and young adults who are putting children off figure to drive demand for tiny homes. The same will be true for increasingly diverse young buyers who have more debt and less access to family assets.
These changes may force communities, builders and buyers to rethink what a first home looks like. In places where even small single-family homes are out of reach for many, the answer might be a condo.
Today, in some parts of the country, there is virtually nothing on the market for less than $300,000 that resembles the American starter home of the past 70 years. In Raleigh, North Carolina, there were 17 such single-family homes with at least two bedrooms listed for sale at the end of September. On the other side of the Denver subway, there were six; around Salt Lake City, three.
In Houston, Felecia Ellis drove during lunch breaks from a dental clinic looking for such a home in the $200,000 to $250,000 range.
“Driving around a neighborhood I’m like, ‘Oh my god, this is a nice house, I know I can afford it,'” Ellis said. Then she pulls out her phone in the hopeful ritual of a first-time home buyer. The answer in the list, more often than not, is that she actually can’t afford it.
“And I’m like, Tell me this is a joke,” she says. “This house is $425,000.”
The easiest way to build entry-level housing on increasingly expensive land is to build a lot of it – to put two, three, four or more units on land that for decades has been reserved for one house.
The result would look more like homes built a century ago, with more duplexes, more townhouses, more landlords adding their own rental units.
Parolek worked with Utah builder Holmes Homes to design a model outside of Salt Lake City. They turned the more typical townhouse on its side, tying small two-story houses along an intimate pedestrian path. The homes hit the market in 2015 at around $200,000.
“It was a home run the minute we built them,” Nageli said. But the costs have increased even since then. And the builder didn’t repeat the concept elsewhere because most communities wouldn’t allow it.
From a builder’s perspective, there’s nothing particularly preferable about high-end homes. Their profit margins are generally not higher. They require more customization. They are riskier to build in times of economic downturn. Entry-level accommodations, on the other hand, are invariably in high demand.
If more communities allowed it, builders would return to that end of the market, Nageli said.
“We would thrive there,” he said.
In Portland, where Wood has long tried to build entry-level single-family homes, zoning reforms now allow multiple units on what were previously single-family lots. Today, Wood is seeking permits for his first triplexes and quadruplexes.
“In 2022, we started our last single-family homes in Portland,” he said. “I don’t think we will ever do that again.”
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