American millennials are expected to be a driving force behind the housing market in 2020, but there’s a problem: There aren’t enough starter homes for all of them

Starter homes are scarce.

caption
Starter homes are scarce.
source
Artazum/Shutterstock

Will the new decade see more millennial homeowners?

According to a new report from Mareesa Nicosia for Mansion Global, citing data from Realtor.com, the answer to that is yes: Millennials are expected to fuel the US housing market in 2020. The generation, who turned ages 23 to 38 in 2019, is finally reaching homeownership age or making the move to the suburbs, Nicosia said.

A forecast for low interest and mortgage rates, as well as a home price growth rate less than 1% (and a predicted price decline in 25% of the biggest US cities) means it’ll be easier for millennials to qualify for a home, Nicosia wrote.

But they might face a major obstacle: a shortage of entry-level homes, largely because newly constructed homes in 2019 were mostly devoted to “upper-tier housing,” defined as those costing at least $500,000, according to the report.

A starter home shortage in the US

A scarcity of starter homes isn’t new. In 2018, starter homes represented just 20.9% of available housing inventory in the US, according to Trulia.

The US housing market is currently a seller’s market – this causes home prices to shoot up, leaving minimal inventory at the middle and low ends, Spencer Rascoff, Zillow’s CEO, previously told Business Insider. But there are other factors driving the shortage, too: rising construction costs, restrictive zoning rules, and changing consumer desires, reported Ben Casselman and Conor Dougherty for The New York Times.

And real-estate investors are only making the problem worse. In 2018, they bought roughly 20% of US starter homes (homes priced in the bottom third of the local market) – twice as many as they did 20 years ago, Casselman and Dougherty wrote, citing real-estate data provider CoreLogic. In the most popular markets in 2018, they bought nearly 50% of the most affordable homes and 25% of all single-family homes.

Investors are outbidding other buyers by paying in cash, and some are buying houses before they’ve even been put on the public market, according to Casselman and Dougherty. It’s tough competition for millennials, who are losing territory in the battleground of starter homes that they already can’t afford.

First-time homebuyers will pay 39% more than first-time homebuyers did nearly 40 years ago, according to Student Loan Hero. The rising cost of housing, the shortage of starter homes, and the cohort of millennials who prefer to rent and avoid hidden homeownership costs – it’s a combination that just may wipe out the starter home altogether.