Getting it about starter homes

The starter home conept is one my husband and I have been struggling with. I have come to realize that in our mid and late 30's we really don't have time for a starter home (moving again in only 5 years while starting a family) Better to wait and get a 30 year home. Even so, I believe our incomes relative to costs, that starter home will still be a cape.

I think the starter home concept is still valid, as long as the buyers don't have unrealistic expectations. They should buy a house they can afford, in a decent area, and expect that they will be living there for at least 5 years. During that time they should pay their mortgage - and even pay ahead on principal if they're able. If they love the house and the area they may be able to add on, or after they've built some equity and seen some appreciation (RE always appeciates over time) they can look to "upgrade."

We lived in our first 2BR home for 6 years, then sold it and bought our current 4BR home, where we've been for 22 years. We put 15% down on the first and never missed a payment, then were able to put 50% down on the second, which we paid off 10 years early (by making extra principal payments each month). Housing costs are higher now of course, but so are salaries so with prudent saving and investing a similar scenario should still be possible.

I think that materialism as well as those ubiquitious RE/perfect home programs has fueled the unrealistic ideal of the "dream home" for young couples. There are a lot of "dream homes" heading to foreclosure now, so reality needs to be part of these major decisions again.

What do you all define as a "starter home"? Is it purely a function of how long you plan on staying in it? I guess I had assumed that it also had something to do with size, or price.

The hole concept of home ownership in this country has gotten so twisted I don't know what to think. You're supposed to buy this 'starter' home when you're young, and have no idea what you are doing with your live and may move at any moment. When you're old enough to say "hey, I'm settled in, maybe I should buy", you can't afford anything.

Unfortunately today the real estate market is such that you have to buy garbage and work your way up to a house you like - you'll never get it the first time, and if you wait you'll never get it at all. (and of course, this artificial inflated pricing of the last 10 years and the correction we're getting now doesn't help any of this...)

I think the "starter" home is pure myth. There's all sorts of people in the world that need all sorts of housing. Not everyone is following the path of buying a small house, then having kids and buying a big house in the 'burbs and then moving into a city condo when retired. With our economy changing, our mindset should also change. Many of these houses (few bedrooms, 1 or 1+1/2 ba) are fine for decades. I'd like to see the term "starter" die.

The "starter home" thing worked great for my wife and me, but we started in the real estate market 10 years ago when it was robust - I would probably steer clear of it in today's market unless you can find a great deal. I was able to move from a condo to a two family which we later turned into seperate condos and sold off, to a single family which we then sold and bought our existing house. We made a ton of money in the process of all of these moves, but I'm not sure how you could do it given the negative appreciation that seems rampant in the real estate market today.

It also doesn't hurt that as an attorney, I was able to save significantly on realtors' fees and attorneys' fees during all the moves - plus, we're fairly handy and were able to do a lot of work to boost the value of all of the places we lived for not too much money. Overall though, I'd be quite leery of the concept of a starter home in today's market. For most I assume it would make more sense to simply rent and save as much as you can until you can buy the house you want. I suppose as with all things though, it depends on the individual and their situation.

I always thought that a starter home referred to the size of the house rather than how long you planned to stay in it...my parents bought a little 3 bedroom, 1 bathroom ranch in the 70s; they still have it with no intention of selling it. And yes, it does STILL have one bathroom!

I just bought a "starter home", a 2bdrm condo. I fully expect that within 3-7 years, I will buy a bigger place. It makes sense for me because renting in the area I want to live is already high, and increasing at what I estimate is 5-10% a year. All the calculations I did said buying would break even at about 3 years. And that's with 1-2% appreciation, which I think is accurate for this Boston neighborhood.

Rents going up 10% a year? Boston home prices appreciating?

Wow. Someone really needs to brush up on the GIGO principle.

What is the big deal Americans have about having more than 1 bathroom. I grew up in the UK in a household of 6 and we only ever had one bathroom.

a number of people in my family utilized starter homes to build equity quickly through rapid appreciation and resale. others bought expandable lots and built up and out if they became attached to the neighborhood. it's absolutely a question of market timing though. there's much more risk inherent in buying a starter home in this market b/c a) we do not know when depreciation will end and b) we don't know how long it will take for prices to rebound. if someone is contemplating a starter buy one that you could live in for a while b/c you may need to potentially hold onto it for a decade.

why does everyone still think real estate will always increase in price, despite the recent evidence?

not sure if that's rhetorical but i'll take a stab. history. real estate values ebb and flow. short of a major economic collapse (ie western pa), the early 2000's will not be the last bubble, never mind period of rapid appreciation. i see an international hub of education and healthcare and a regional power in business, finance and law. we also have a solid amount of cultural and recreational outlets. i also see a limited amount of buildable land and zoning laws that are not changing any time soon. the long term health of the local real estate is still solid. notice i put no time frame on recovery.

"why does everyone still think real estate will always increase in price, despite the recent evidence?"

This statement is incomplete. Over the long haul (meaning decades) it is almost inevitable that houses will appreciate as long as they are properly maintained, if for no other reason than the forces of inflation - short term downturns notwithstanding. If people are still expecting annual appreciation or at this point even appreciation from the height of the market we just passed until probably the end of next decade - they may be aiming too high.

Appreciation over the long haul is pretty much unassailable. Whether that appreciation is even capable of matching inflation at this point... that's another matter - and of course short term depreciation is to be expected in this market.

Marcus, tell that incredulous "in creasing 10% a year?" to my landlord, who just raised the rent on my old apartment 20% in 16 months. And had absolutely no problem renting it. 5-10% increase in rent is a reasonable forecast for the next 3 years. And charles, real estate will not always increase in price, but if you look at recent evidence, there are several neighborhoods around here that have been creeping up in value (1-2%) since 2004-2006, when they hit their peak. Stable neighborhoods, which allow one to become "accidental landlords" if the need arises.

Actually, rents dropped 40% in the past year, and house prices are expected to go down 90% next month.

See? Anyone can have an Internet discussion based on made-up statistics with no reference or source. It's easy!

RE RENT: well the apartment we rented in Kendall square in 2003 - 2005 for $2300 a month is now renting for $3200 PLUS $150 a month for parking (parking was included in our rent ) - so perhaps its yet again a matter of location/ neighborhood ?

My husband and I have made more than $150k within the last 4 years by buying and selling two "starter homes". We did some simple and inexpensive renovations and sold both for very large profits, while enjoying the homes. That said, our intention was to "break even" knowing that we would have flushed thousands down the toilet if we had decided to lease. We were able to take advantage of great tax benefits as well. If we had not "started" somewhere, we would never have been able to afford our dream home.

Housing should go up at the rate of inflation, as incomes rise, people can pay more and so prices float up. Pretty simple really.
What we saw in the bubble was an abberation. Banks normally kept risky behavior in check, but in this period of time, basically gave everyone foolish enough to want it a giant wheelbarrow full of cash ( up to around 8X the fool's salary). Naturally, prices went through the roof.
Now mortgages are very tight. You cant get 0-5% down mortgages, many don't qualify. As a result of this contraction, prices should drop -a lot. We are still going through the slooooow deflation of sticky prices. This will take awhile.

if you look at prices of real estate over the last 100 years, you'll see that it barely went up over inflation - even counting bubbles and booms in. And there are entire generations where real estate went down...

A lot of the stuff up there extrapolates from recent experience, which was clearly an aberration.

Real appreciation over the long haul is actually pretty much assailable, both from data and from classic economics - economic rents without barriers to entry trend to zero over time.

This is not to say no one will make money from real estate again - frankly, I think I will, and intend to try. Its that people will stop being able to make "simple and inexpensive improvements" and sell them for large profits - ie make money for just showing up.

And its amazing how many people write off the crash as the aberration, and not the run up to the crash, which actually was the aberration.

I like to ask groups of financially sophisticated people (I bankers, fund managers and the like) what they think the average real return on real estate has been over the last 100 years, and they consistently overestimate it by an order of magnitude, thinking its something like 3 or 4%. Its actually around half a percent.

those same bankers and fund managers will tell you that the stock market returns 8-10% annually. i have been told that an investment property that does not break even day 1 makes zero financial sense while watching those same individuals sock thousands of dollars a month into managed funds. i do not know a single person who has created sizable wealth and retained it through traditional investment vehicles, excluding employment options and those reaping the benefits of transaction costs. on the other hand i know literally dozens of people who have seven figure + net worths almost exclusively through real estate investments and they have had vastly varied strategies and some of the strategies have played out for 5+ decades. as you know pure price speculation is not the only way to make money on real estate. you have use, improvement, development, leverage, rentals, inflation hedge, tax benies, and municipal improvements just to name a few off the top of the head. residential real estate is a human need, allows hands on control and is the most tangible investment option out there. all that being said, using your primary residence as an investment aside from downsizing seems a little over the top for me. is your vehicle an investment too?

last on my rant, it seems to be a pretty popular opinion that harvesting home equity was summarily an unwise financial decision. if the debt was used for marketable home improvement or consolidated existing debt w/ less satisfactory terms it was a no-brainer as long as you maintained your repayment timetable and you're comfortable w/ the exposure.

Charles,
I agree with your comments, but why do the mainstream media outlets seem to ignore this fact? Why do we see prices have gone up 200% and then dropped 10% and the media is ready to trumpet that we have hit bottom?
Here on this blog, we have seen real journalists replaced with Realtors. Why is no one covering this story? Sellers should know what the reality is so they can start to adjust expectations.

To "A buyer Who Gets It":

You are assuming that the market does not decrease in value at any point during your tenure. For example, if the market declines a modest 2% over the next year of ownership, then you will have to hold onto the house for just under three years to break even i.e. selling it for what you paid for it. This assumes real estate market returns of -2%, +1%, +2%.

If the market decreases a modest 2% in the next year, to reach your target annual return of 1% the market must grow by at lease 2.5% in the next two years to make your analysis hold.

Right now, this is not a bet I want to make. Prices will continue to slide and even modest declines had deep impact on highly levered investments.

We bought a small home in New Hampshire more than 20 years ago. We accumulated equity. When we sold (I relocated for a job), the country was in a recession and the home value have fallen. We sold for a little less than we paid, but we had accumulated equity and had significantly more remaining, (after paying taxes, expenses), than our initial down payment. We then used this for a downpayment in a nicer home, where we currently reside in Massachusetts. Although we sold in a recession , we also bought in a recession. We are not sorry that we bought the initial home.