The young couple saves up for the chance to buy a modest starter home, say a ranch or small cape. A few years later, they sell their cozy little starter and move up to something bigger in a better neighborhood to accommodate their growing family.
It's an image at the heart of the American Dream. But in a major market shift, the number of starter homes has plunged while their prices have shot up. And homeowners who start off with a more modest home are finding it difficult to trade up later in a tight market amid a shortage of listings of all types, real estate experts say.
In fact, some real estate and financial experts contend that proverbial young couple may be better off saving up for something more substantial and skipping the starter home altogether.
"A young family may want to stretch a little bit, especially if they have the financial security of two working spouses," says Adam Van Wie, a certified financial planner in Jacksonville, Fla. "That way you avoid the transaction costs of switching homes in a few years, and lock in the historically low interest rates available right now."
Starter homes get expensive
One strike right now against starter homes is, they are both hard to find and, ironically enough, they cost too much.
There had been a 9.6% jump in the price of these more modest homes over the past year, defined as below $180,931, according to Trulia. That's roughly double the gains seen by middle market and premium homes, according to Trulia.
At the heart of the problem has been a drop off in the number of entry-level homes across the country on the market.
Listings of starter homes fell 14% in the first quarter of 2018 compared the same period last year, according to a Trulia survey of the nation's 100 largest metro markets.
The number of starter homes for sale across the country dropped by 120,000 between 2015 and 2017, according to the National Association of Realtors, leaving a total of 450,000.
And that came atop already big losses of starter homes amid the Great Recession and the collapse of the real estate market, which hit the lower end of the real estate market hard.
An epidemic of foreclosures flooded the market with starter homes, many of which were snapped up by investors and converted into rentals.
Meanwhile, builders haven't been replacing the starter homes that were lost during those tough years.
"Buying a starter home can be a difficult task these days," says Michael Cohen, an agent with Keller Williams in Needham, an upscale suburb outside Boston. "Inventory levels on those homes are incredibly tight and demand for them far outstrips supply."
But for buyers who are prepared to stretch a bit, there may be more to pick from as the number of homes in the middle and high end of the market has increased, brokers say.
As the real estate market rebounded over the past few years, builders have been putting up new homes again, but are focusing on more profitable - and less risky - luxury homes.
The number of premium homes on the market - defined as $646,188 and up - has jumped by more than 13% over the past year, according to Trulia. In the nation's largest metro areas, premium homes make up 55% of the market, compared to 21% for starter homes. The number of homes in the middle of the market, $311,234, has edged up 0.9%.
"I think given the shortage of inventory and the still low cost of mortgage money, pushing the ratios of income does make sense," says Michael Carucci, executive vice president of Gibson Sotheby's Intl. Realty. "What's really important here is job security of the buyers and likely hood of increased earnings moving forward."
Trading up harder to do
Homeowners trade up for a number of reasons, many of them overlapping. They may need an extra bedroom or two and have an eye on a nearby suburb or neighborhood with better schools.
Maybe their first home left them with a 90-minute commute from the exurbs and now they want to a more desirable location closer to the city, which will also mean having to buy a more expensive home.
However, one growing argument against buying a starter home is there is no guarantee you will be able to trade up later for something larger.
Sure, homeowners who get a foothold in the market with a starter home probably won't have a problem selling later.
But when it comes time to sell, these homeowners face the dilemma of landing something bigger or in a more desirable zip code in a tight market, especially in the hottest markets along the coasts, where buyers are often competing in multi-bid situations for a scarce number of listings, brokers say.
So instead of rushing to buy a starter home, buyers may be better off trying to find something they will be happier with over the long term, notes Cohen of Keller Williams.
Sam Schneiderman, principal broker of the Greater Boston Home Team, advises buyers to think of location first and then size.
Most importantly, buyers should look for a house in a town, city or neighborhood they will be happy living in - and commuting back and forth for - over the long-term, he says.
If the house isn't as big as you would like, you can always expand it later, says Schneiderman, who advises buyers to check the local zoning to see what is allowed. Additional features can also be financed later by tapping into the home's equity.
"All the features in the world in the best house or condo imaginable won't make most property owner's feel satisfied coming home to a great house in a location that they aren't happy with," says Schneiderman, vice president of the Massachusetts Association of Buyer Agents.