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Builders Cool on Luxury Housing, Target Starter Homes

June 2, 2017

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While demand from U.S. homebuyers continues to outpace the supply of homes on the market, home builders have made significant progress in closing this gap recently. This is especially true now that a broader swath of the homebuyer market…

is seeing a prime opportunity to invest, with low interest rates and higher wages prevailing.

As a result, new data show builders and developers are increasingly targeting starter homes for younger homeowners. The Wall Street Journal reported that in the first quarter of 2017, nearly one third of new residential construction by the biggest U.S. building firms consisted of properties smaller than 2,500 square feet. This puts them squarely within range of what is usually considered a starter home. At the same time last year, only 27 percent of new housing fell into this category, with an even smaller 24 percent in 2015.

Trend reversal

With two years of considerable year-over-year growth, homebuilders and buyers are finally bucking a trend that persisted through much of the post-recession housing market recovery. Too many younger, less affluent Americans were unwilling to risk homeownership. At the same time, construction firms faced their own financial troubles, compounded by a shortage of workers. The result was a glut of luxury homes on the market but very few that could be considered starter homes.

Even as demand for all housing types picked up around 2015, the inventory of new and existing homes could not keep pace. This has driven home prices up quickly, a trend that continues – home values were nearly 6 percent higher in February 2017 than one year prior, according to the S&P CoreLogic Case-Shiller U.S. National Home Price Index.

Still, news of renewed interest in starter homes from buyers and builders adds to the evidence that the U.S. economy overall is growing ever more resilient.

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