I’ve been thinking about the current challenges facing our housing market. For many years, the average age of the first-time homebuyer has been increasing; it is currently sitting at 38. There are numerous factors at play, one of which is the disappearance of the “starter home”.  

A hundred years ago, our grandparents and great-grandparents could buy a pre-cut house kit out of the Sears catalog. Sears produced these kits from 1908 to 1942, in a wide range of models and sizes. They promised that the kits were so easy to use, that an unskilled laborer could complete their own house in 90 days. You could get a 2-bed bungalow for $1500, or a massive 12-room home for $4000! (To be fair, these prices did not include the land, the foundation, and heating, but still! Even after adjusting for inflation, these prices were a much smaller percentage of average income at the time.) 

Here is an article with more of these vintage ads.

The suburbs of Chicago have the highest concentration of Sears homes in the country (here is a list of all known homes in Aurora, for example). Many might live in a Sears home without realizing it, as the sales records were lost and the homes were customized and remodeled over the years. There was even a social stigma associated with living in one of these homes – you didn’t want people to think you were cheap! Now, younger people would kill for the chance at a home like these.  

The Sears catalog homes are a prime example of how easy homeownership seemed to be to achieve in the past, and there were many other builders constructing modest, affordable homes. Things began to change significantly in the 1970s, when high inflation and high interest rates led to a “stagflation” cycle that dragged down the economy for years. The central bank’s measures to tame inflation drove up borrowing costs for real estate developers and ultimately shrunk homebuyers’ purchasing power. (While those trends may sound familiar, the current housing market is resilient, not to mention our present solid job growth.) This was the beginning of the death of the starter home and beginning of the housing shortage that we are still dealing with today (with the exception of the 2008 bubble).  

At its root, inflation results from an imbalance of supply and demand. Even before the pandemic, we were starting to see the effects of over a decade of underbuilding. When interest rates fell to record lows, buyers who swarmed the market were met with scarce inventory. 

Few builders construct anything like starter homes in today’s housing market. In fact, they are motivated to do the opposite, packing massive single-family mansions right next to each other. You can’t buy homes built 25 years ago at an entry-level price today, as they now go for half a million dollars. The disappearance of such affordable homes is at the heart of the American housing crisis, a problem that is growing more severe each year. But more specifically, there aren’t enough modest, no-frills homes that could provide young people (perhaps already burdened with student debt) a chance to start building equity. 

The affordable end of the market has been squeezed from every side. Land costs have risen steeply, and construction materials and government fees have become more expensive. Communities nationwide are far more restrictive today about what housing should look like and how big it must be. Nationwide, the small, detached house has vanished 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, nearly 70% of new houses were that small. 

Meanwhile, the roughly 72 million millennials aged 25 to 40 are more than a third of the housing market. This unprecedented demand, exacerbated by the COVID-19 pandemic and dwindling supply, drove up prices, pushing starter homes further out of reach. 

The real question is, can we find a way to improve the housing market’s value and supply of housing availability?  While it may not be an immediate solution, many believe the first step is to address and reform zoning laws to encourage development.  

How can you help? Vote locally, attend your city council meetings, and be a voice for the sort of change that you’d like to see at the local level. The future will reveal the effectiveness of these measures!