An entry-level home is still an attractive way to enter the real estate market, but they may be harder to find, as one real estate agent puts it.
New home sales in the US rise to highest level in over a year
New home sales in the U.S. rise to their highest level in over a year.
Larry Freudenberg remembers the first house he bought with his wife, Marsha, a year after they both graduated from college. It had only one story, with a second story unfinished, and the exterior was clad in cedar planks. “We thought it was a castle,” he said.
The couple lived in the house for about five years, adding the second floor only when they had enough money to pay for the building materials. When they finally started a family, they sold the house and built a larger home.
The first house has been a tried and tested strategy for home ownership for generations: you buy a smaller, cheaper property, build up some equity and use it to move to something bigger, nicer or in a more attractive location.
But like so many other housing market stories, the highly competitive market of 2024 could make that first home feel like a relic of a bygone era. The housing market is tight, expensive and inhospitable to first-time buyers, making it more likely that that first home will become the buyer’s forever home – or at least long-term home – if they can afford to buy at all.
The costs
Larry was a banker and Marsha was a teacher. It was 1982, and both earned $13,000—about $42,400 today. But the house in Lilburn, Georgia, cost $60,000. That would mean about $195,600 in 2024: less than half the price of the average home, which was $422,000 in June, according to the National Association of Realtors.
That’s one of the main reasons why Freudenberg’s son Stephen, who now works as a real estate agent in the Atlanta area, says his parents’ path is no longer typical. “First-time home ownership is hard to come by. First-time buyers can’t afford anything, and if something needs to be done to it, it puts too much strain on the budget.”
In 2022, only 16% of homes for sale cost less than $200,000, and in 2023, that number rose to 13%, according to a Realtor.com analysis obtained by USA TODAY.
“People often buy entry-level homes with the intention of staying in them, say five years or so, but in today’s market with its high prices and interest rates, it’s reasonable to assume that buyers are gearing up to potentially stay in their homes longer,” said Danielle Hale, chief economist at Realtor.com. “People are really thinking long-term because they’re not anticipating an opportunity to move up.”
This thesis is supported by data: Home ownership time has increased from six years in 1987 (the earliest available data from the National Association of Realtors) to 10 years in 2023. The same report also finds that first-time buyers of 2023 expect to stay in their homes for 15 years.
These factors may be the main reasons why many of Stephen Freudenberg’s younger clients now view the real estate market differently than his father did.
“I have a friend who has been looking for three years,” said Stephen. “I think he’s given up now and is happy to rent. He’s got money from his family and is still being outbid by tens of thousands of dollars. Where is he going to get the money for repairs?”
Another factor is rental prices, which have dropped just enough in many areas, including Atlanta, to make it a somewhat attractive alternative. Yes, many young people are attracted to the idea of building equity, says Stephen, but the stress of the closing process and the repairs that may be needed may outweigh that.
The American dream?
Yet there are many Americans for whom the idea of ownership still outweighs all challenges.
“I grew up in the Midwest and was raised with the idea that this was a major milestone in terms of safety and comfort,” said Coco Tait, a 28-year-old program manager at a university in Washington, D.C. “I wanted a place I could settle in and call home. I wanted autonomy over my own life.”
Tait was renting, but her roommate had to move out. She saw the change in her living situation as a “sign.” Tait also said, “I wanted to have something as small as possible” so as not to become house poor.
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Working with Victoria Ray Henderson, a real estate agent who exclusively serves buyers, Tait found a 500-square-foot junior one-bedroom apartment in Silver Spring, Maryland.
Although Tait is very aware of property values and the factors that affect appreciation, building equity is not her top priority. She values owning a home for less tangible reasons: “I don’t think I’ll live here forever, but I would say for the next 7 to 10 years or so. It has to do with that idea of stability, knowing that I can make that decision.”
An instrument of justice
Despite all the intangibles, buying a home as early as possible is still a tried-and-true way to build equity, says Danielle Hale, chief economist at Realtor.com. What will be a little different in 2024 is that it may take a little longer to build that equity because home values are so high, “which suggests there could be some slowdown.”
Hale has a few tips for anyone considering buying a home. First, they might consider an adjustable-rate mortgage to leverage the savings from the initial lock-in period for the five to seven years they plan to keep the home.
Hale also suggests that people follow Tait’s example and consider buying a condo. Condos have definite drawbacks, including that they don’t typically appreciate in value as quickly as single-family homes, she said. Buyers also need to consider monthly utility costs, which can unexpectedly spike during times of high insurance costs.
The allure of the American dream may still hold some appeal, says Stephen Freudenberg, but “I think we just live in a different time.”
