Han Chang doesn't believe in starter homes -- and he shares that sentiment with a burgeoning number of younger Americans.
Chang, co-founder of Investmentzen.com, recently moved from San Francisco to Austin to become a first time homebuyer, but he's aiming higher than first-time buyers historically have.
"My wife and I are totally ignoring starter homes and looking into multifamily properties to owner occupy," Chang says. "In particular, we're going big and shopping for a four-plex residence, since those still qualify for standard conventional mortgage loans."
Chang says the minimum down payment starts at an affordable 5%, but there is a catch. "That forces us to pay private mortgage insurance on the loan, but we think the tradeoff is totally worth it since our tenants will be helping out with that," he says. "As long as the property cash flows with all tenants in place, in the worst case scenario, we can move out and keep renting out the place."
That, he says, will allow him to build significant amounts of equity faster than he could have otherwise, since he's leveraging other people's money.
What Chang and others are doing is a real game-changer in the housing market. After all, the so-called starter home has, historically, been the gateway to the American Dream. Traditionally, homeownership is a statement-maker for generations of young adults, who can point to their first home and say, "See, I made it -- I'm a homeowner and now the sky is the limit."
But what if the starter home is becoming largely ignored by young would-be homeowners, just like Chang? That could be happening right now, according to Bank of America's first Homebuyer Insights Report.
In it, a whopping 75% of first-time buyers "would prefer to bypass the starter home and purchase a place that will meet their future needs, even if that means waiting to save more." Most survey respondents told Bank of America they have to put off a starter home, anyway, thanks to abundant student loan debt and credit card debt.
"In many cases, we found today's buyers are taking a long-term view of homeownership," notes D. Steve Boland, a consumer lending executive at Bank of America. "They want to purchase a home that will meet their future needs and understand that, in some cases, that will require saving more, waiting longer and making sacrifices."
As they get closer to purchasing a home, younger homebuyers are more willing to give up some features in their dream home, Boland says. "The reality is that many buyers today are balancing important financial priorities," he says. "To them, saving for a home is as important as saving for retirement. Plus, they're coping with student loans, credit card debt and college savings for their children."
Taking a long-term view may not be a bad idea, as long as buyers take a much-needed reality check.
"Buying a home is a big decision that is significantly motivated by life situations including accommodating a growing family, living near a job, a city's amenities and retirees downsizing and upsizing," says Kathy Cummings, first-time homebuyer expert at Bank of America. "Whether it's a starter home or a bigger house, buyers need to balance a mortgage with their overall financial situation, assessing how much they should borrow without putting the rest of their financial plans on hold. For some, it is a great time to buy a bigger house or a house for the long-term versus a starter home due to historically low interest rates, relatively affordable homes and more stable incomes."
Cummings says potential buyers should look at their full financial picture, including student loans, how long they plan to stay in one home and job changes, when deciding whether to buy. "Homebuyers should look to invest in a home that will hold its value through various real estate cycles," she adds. "That way they're not in danger of losing money in case they have to sell, should one of the aforementioned life changes -- like a job change, growing family, etc. -- occur unexpectedly."
Other real estate insiders agree with that sentiment. "Whether someone should buy a starter home or a larger home, will depend on their financial position," says Mark Ferguson, a realtor, real estate investor, author and the creator of Investfourmore.com. "I love the advice a lender gave me the other day: figure all of your expenses, save 20% of your income and then see how much you have left over for a house payment. When you get an idea of how much you can spend on a house and still save money, you'll get an idea of how much home you can afford."
Yet with the high transaction costs specific to real estate -- perhaps the notion of a starter home is unrealistic for many, says Michael Kelczewski, a Millennial and a realtor with Brandywine Fine Properties Sotheby's International Realty. "If financed, in order to recoup financing charges and closings costs, the general rule of thumb is one must own a property for five years," he says. "So, bypassing a starter home may make sense."
Then there are the real estate professionals who believe bypassing the starter home is a lousy idea.
"I don't believe that first time buyers should pass over the starter home for many reasons," says Amber Dolle, a Los Angeles-based real estate agent. "Most first time buyers don't really know what they like or dislike about a home until they've owned their first home. So a starter home is a good chance to get to know what you really want in a more permanent home in the future."
"Additionally, if the market ever goes down, you have less equity to lose on a home that costs less," she adds. "Plus, on a positive note, if and when the market comes back up, starter homes are the first to make a come back and sell."