Tiny Budgets, Big Dreams

In the heart of Redmond, Oregon, Robert Lanter's 600-square-foot home is a stark emblem of the American housing landscape's seismic shifts. This isn't just Lanter's residence; it's a microcosm of the vanishing affordable starter home phenomenon and its profound impacts on housing affordability nationwide.

Lanter, a 63-year-old retired nurse, navigates his compact living space with a mix of humor and resignation. His home, acquired for under $300,000, reflects a burgeoning trend towards smaller, more affordable housing units as traditional starter homes become increasingly scarce.

The backdrop to Lanter's story is a housing market in turmoil. Over the last decade, the surge in housing costs has outpaced income growth, pushing the dream of homeownership out of reach for many Americans. The median sale price of a single-family home in 2022 was 5.6 times higher than the median household income, a stark increase from just a few years prior.

Rising land, labor, and materials costs exacerbate this affordability crisis, compelling builders to focus on high-margin, high-end homes. Consequently, the supply of homes affordable to the middle class has dwindled dramatically, with only one in ten new homes now within reach.

That said, some tailwinds are suggesting that the starter home may be poised for a comeback. For starters, the size of homes is slowly coming down, according to NAHB.

Further, there is some political will to push incentives and funding towards more affordable starter homes. According to reports, the Biden administration has recently proposed the Neighborhood Homes Investment Act. This plan aims to construct 500,000 starter homes in under-resourced communities over the next ten years, targeting improved homeownership rates among Americans under 35, which lags significantly behind older generations.

There are also private-sector solutions. Builders like Hayden Homes in Redmond are innovating with smaller housing units. Lanter's subdivision, Cinder Butte, features homes as small as 400 square feet, targeting buyers seeking ownership over renting despite the limited space. This move towards smaller dwellings is not isolated to Oregon; it's a national trend driven by economic, demographic, and regulatory pressures.

State and local governments have begun facilitating this shift by easing zoning regulations for higher-density, smaller-scale developments. However, these changes also underscore the broader issue of middle-class diminishment as traditional notions of the American Dream adapt to new economic realities.

HEADLINES

Inventory Relief: The mortgage rate lockdown premise suggests that rising rates prevent inventory growth as homeowners are unwilling to trade their low mortgage rates for another home. However, inventory has shown year-over-year growth despite mortgage rates exceeding 7%. Weekly inventory rose from 497,608 to 498,339 in the last week of February 2024, compared to a fall from 430,395 to 419,419 the same week the previous year. The inventory peak for 2023 was 569,898, while the recent inventory bottom was in 2022 at 240,194. New listings data is also growing yearly, with 52,189 new listings in the last week of February 2024, compared to 48,156 in 2023 and 49,019 in 2022. (HW)

More Choices, Less Affordability: New home listings rose 13% year over year during the four weeks ending February 25, the biggest increase in nearly three years. However, high mortgage rates of 7% and high home prices have led to an 8% decline in pending sales, the most significant drop in five months. The typical homebuyer's mortgage payment is $2,671, just $47 less than the record high in October. Despite this, Redfin's Homebuyer Demand Index is up 10% from a month ago, indicating increased activity from potential buyers. The median sale price for homes is $365,888, a 5.4% increase from the previous year, while the median asking price is $396,975, a 5.5% increase. (Redfin)

Underperforming: The US housing market faces a shortage of new homes due to over a decade of under-building relative to population growth. Between 2012 and 2023, there were 17.2 million household formations, but only 14.7 million housing units were started, and 13.4 million were completed. The gap between single-family home constructions and household formations grew to 7.2 million homes. However, including multi-family home construction reduces this gap to 2.5 million homes. (Realtor.com)

BY THE NUMBERS

$1,377: The March 2024 Apartment List National Rent Report indicates a slight increase in rental prices by 0.2 percent in February, marking an end to six months of consecutive rent declines, with the national median rent now at $1,377. This increase aligns with the typical seasonal pattern of rising moving activity post-holidays, although the last two years have seen steeper seasonal declines and milder increases. Consequently, year-over-year rent growth remains negative at -1%, suggesting that despite recent cooling in the market, rental prices are still, on average, slightly cheaper than a year ago, yet over $200 higher per month compared to three years ago. (Apartment List)

$1: The Canada Pension Plan Investment Board (CPPIB), which manages a C$590.8 billion ($436.9 billion) fund, has been selling its interests in office buildings at discounted prices, including a pair of Vancouver towers, a business park in Southern California, and a redevelopment project in Manhattan. The latter was sold for just $1, raising concerns about the future of office building investments amid the rise of remote work and higher borrowing costs. While CPPIB continues to invest in office buildings, it is also looking to sell properties that require additional investment to redeploy the cash for higher returns. The fund's real estate portfolio, worth C$41.4 billion, includes various property types across the globe. (Fortune)

3.8%: A panel of housing experts predicts a 3.8% growth in national home prices in 2024 and 3.4% in 2025, according to the Q1 2024 Fannie Mae Home Price Expectations Survey. These estimates are higher than the previous quarter's predictions of 2.4% for 2024 and 2.7% for 2025. The panel also anticipates a median 30-year fixed mortgage rate of 6% by 2024. The survey polled over 100 experts and found that 41% of panelists in Q1 2024 saw a higher upside risk to their home price forecasts, compared to 26% in Q4 2023, mainly due to ongoing housing supply constraints and lower mortgage rates. (Fannie Mae)

Become a paying subscriber of Premium to get access to this post and other subscriber-only content.

Already a paying subscriber? Sign In.

A subscription gets you:

• • Real Estate Trend Reports
• • Deep Dives
• • No Ads
• • Forever Pricing