{"id":417,"date":"2023-07-17T12:00:00","date_gmt":"2023-07-17T12:00:00","guid":{"rendered":"https:\/\/moneywithkatie.com\/starter-home-myth-housing-unaffordability-high-interest-rates\/"},"modified":"2025-09-03T18:55:40","modified_gmt":"2025-09-03T18:55:40","slug":"starter-home-myth-housing-unaffordability-high-interest-rates","status":"publish","type":"essays","link":"https:\/\/moneywithkatie.com\/essays\/starter-home-myth-housing-unaffordability-high-interest-rates\/","title":{"rendered":"Did Housing Unaffordability and Higher Interest Rates Finally Kill the \u201cStarter Home\u201d Myth?"},"content":{"rendered":"
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The first documented mention of the term \u201cstarter home\u201d was nearly a century ago in 1926<\/span><\/a>, which described it as \u201cfor the man and wife who wants [sic] a home with comfort, but small expense.\u201d <\/p>\n

What do you think, man or wife? Interested in a little comfort with a small expense? Can I interest you in a vaguely sexist, small-but-mighty fortress? <\/p>\n

A starter home is usually<\/span><\/a> a 2- or 3-bedroom house under 1,400 square feet. Back in the 1940s, 70% of new houses were that size, and the median home value in the US was $2,938<\/span><\/a> (or $50,198.04 in 1945, adjusted for 2023 dollars).<\/p>\n

The concept seemed reasonable enough, and after the second World War, a \u201cstarter home\u201d became synonymous<\/span><\/a> with the \u201cAmerican Dream.\u201d (Truly a once-in-a-century marketing success for, I assume, the National Realtors Association, second only to the \u201cdiamond is forever<\/span><\/a>\u201d campaign.)<\/p>\n<\/div>\n

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\n \u201c<\/span>The idea that you\u2019re going to make a sizable profit or cash in for a fancier spot doesn\u2019t really pass the historical vibe check.\u201d<\/span>\n <\/p><\/blockquote>\n<\/figure>\n
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Today, only 8% of new single-family homes meet those pint-sized requirements, and the average price per square foot hovers around $150<\/span><\/a>, which would mean $210,000 for a 1,400 sf. hacienda in today\u2019s dollars (if you\u2019re doing quick math, it\u2019s roughly 4x more expensive). <\/p>\n

So you might assume\u2014by the looks of this price growth\u2014that getting in on one of these coveted starter homes is the key to building equity and shielding yourself from greedy landlords; the pathway to your ultimate Barbie Malibu Dream House. <\/p>\n

It\u2019s often positioned, after all, as a way to make a profit relatively quickly: Live in your bungalow for a few years, and move on up the property ladder. <\/p>\n

But even if you were<\/em> able to snatch up a starter home at a decent price, the idea<\/span><\/a> that you\u2019re going to make a sizable profit or cash in for a fancier spot doesn\u2019t really pass the historical vibe check.<\/p>\n<\/div>\n

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Graph Credit: Nick Maggiulli , Of Dollars and Data.  <\/p><\/div>\n

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Between the end of WWII until the early aughts, US home prices appreciated by just 0.32%<\/strong> per year after inflation. In fact, practically all<\/em> of the \u201creal\u201d growth in the housing index happened in the last couple of years. (The 3-year<\/span><\/a> annualized returns are an ahistorical 11.49%.) If you bought in 2020 with a sub-3% interest rate right<\/em> before prices exploded, you\u2019d be forgiven for assuming you made the deal of your lifetime. <\/p>\n

Similarly, if you bought your first home in the 1970s for a pile of gum wrappers and an expired Big Boy gift card, you\u2019d also<\/em> be forgiven for assuming that home ownership was your ticket to wealth\u2014because while you probably didn\u2019t see real<\/em> meaningful price gains until recently, you paid a relatively cheap price of admission for shelter. <\/p>\n

But I\u2019ve always been skeptical about the fundamental premise of how a starter home is supposed to buoy your net worth for one simple reason: The loan amortization of a mortgage front-loads your interest payments<\/strong>. That is to say: In the first several years you live in a house, the payments you\u2019re making are almost exclusively<\/em> interest. <\/p>\n<\/div>\n

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\n \u201c<\/span>In the first several years you live in a house, the payments you\u2019re making are almost exclusively interest.\u201d<\/span>\n <\/p><\/blockquote>\n<\/figure>\n
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Couple that with high transaction costs to buy and sell, and it\u2019s a wonder anyone breaks even<\/em>, let alone turns a profit that would enable them to upgrade to a nicer place. Most of the equity you have in a home you sell after five years comes from price gains on your initial<\/em> down payment, but in an overpriced housing market full of 5%, 3%, or even 0% down payments (often due to financial necessity), that assumption becomes shakier.<\/p>\n

These mathematical inconsistencies were, of course, easier to ignore when rates were low and prices were reasonable. But now? Well, don\u2019t take my word for it. Let\u2019s look at an example in a city reflective of our national averages.<\/p>\n

Let\u2019s head to the home of the Braves<\/h2>\n

Take Atlanta<\/span><\/a>, a city that\u2019s relatively in line with the average cost of living across the US. We\u2019ll use medians where data is available, but unfortunately, in some cases we only have averages to work with.<\/p>\n