Across the U.S., the number of starter and trade-up homes remains on a downslide, with starter home inventory dropping 8.7% and the trade-up category falling 7.9% year-over-year during the first quarter of 2017 according to Trulia’s Inventory and Price Watch report. Housing inventory, in turn, fell to a historical low after declining for eight-straight quarters
The share of starter homes dipped from 26.1% to 25.9% during the period. Prospective buyers in the segment would need to pay 2.9% more for a home purchase during the quarter than they would a year earlier.
The median list price for a starter home in 2017's first quarter was 8.3% higher than it was a year ago at $165,015, requiring a 38.3% share of a buyer's income. Thirty-percent of income is typically deemed affordable for housing costs.
While starter homes are the gateway property for getting first-time buyers into the market, affordability challenges in the segment could stunt this group's potential. First-time buyers alone accounted for 35% of home sales in 2016, up three percentage points from the year before and comprising the largest share of sales since 2013, according to the National Association of Realtors.
Activity in the segment only stands to grow as wages pick up, job opportunities expand and pressure on housing inventory loosens. Still, headwinds from mortgage-rate hikes and mounting price pressures from slow inventory growth could shake the confidence of would-be buyers.
The growing number of first-time buyers has helped rejuvenate strong housing market conditions in the entry-level segment — and builders are starting to notice. Meritage Homes with its LiVE.NOW. homes category and D.R. Horton with its Express Homes division are among those leading the way with smaller-scale, lower-cost homes targeting first-time buyers. Still, homes priced below $200,000 — typical entry-level stock — only amounted to 19% of U.S. home sales in 2015, compared to 38% in 2011, according to The Wall Street Journal.