As starter homes disappear, a townhouse and condo boom in the 'burbs
Katie Pilot isn't your stereotypical millennial.
While nearly one-third of her millennial peers are living in their parents' homes, Pilot has been on her own since she graduated from college. And while many of her peers classify themselves as underemployed, the 24-year-old has been thriving in her communications job at a medical-products company in Radnor.
Yet no matter how hard she tries, there's one millennial cliché she can't seem to escape: the elusiveness of traditional homeownership.
It's not that Pilot didn't try as she set out to find her very first traditional single-family home last year. In fact, she searched for weeks. But like others within the millennial population, Pilot has discovered a startling change in today's housing market: The quintessential first-time "starter home" seems to be disappearing.
Across the nation and the Philadelphia region, there is a dire shortage of starter homes. Buyers entering the market for the first time are worse off than they have been in years, real estate observers say.
By some estimates, national starter-home inventory is down by more than 40 percent since 2012. By the fourth quarter of 2016, real estate search engine Trulia found, entry-level homes represented less than 25 percent of the nearly 900,000 available homes nationwide. In the Philadelphia metro area, that market share hovered around 30 percent — about 2,200 homes.
The deficit comes at a severely inopportune time: The millennial generation — once notorious for urban living, delaying marriage, and a propensity for renting — now is itself aging. The oldest are 37 years old. Millennials are ready to marry, have children, and buy their first homes.
Yet when they begin looking, few entry-level options exist, the data show. And many of the traditional starter homes that do remain are priced higher than ever before.
The dearth of starter homes has forced millennial and other buyers to consider other entry-level opportunities. In the Philadelphia suburbs, like elsewhere nationwide, builders have largely strayed away from traditional, single-family properties in recent years. Instead, in the suburbs, there's been a new-construction boom of multifamily units and townhouses. (The city, meanwhile, is experiencing a glut of new apartment units.)
The change in housing stock could present problems, observers say, as the millennials' families expand. Townhouses, rental properties, and condominium units will do for only so long, they say.
"There is this embodied energy of young households that are demanding to go out on their own, but are finding it challenging to do so," said Ralph McLaughlin, Trulia's chief economist. "Inventory is low, and construction is on the middle-end."
"Developers should be savvy to the fact that the next big thing is young households will emerge and want smaller [homes] that are closer to jobs," he said.
The lack of single-family starter homes has largely been created by postrecession factors, industry observers say: a combination of tighter lending, less construction staffing, and more risk aversion among builders. Combined with higher prices for land and, in this region, little open space, builders today simply aren't building as frequently, industry watchers say.
According to McLaughlin, the amount of new construction today represents just 63 percent of the 50-year U.S. average. And when builders do choose to build, the data show, they are doing so in middle-tier and higher price points.
"Developers, especially those around today, probably learned their lesson about risk 10 years ago," McLaughlin said. "They are increasingly building at the middle and premier tiers because there is less risk and less error if something goes wrong."
The lack of newly built starter homes has been compounded by an increasingly dwindling supply of older, previously owned entry-level homes. After the recession, investors began scooping up lower-priced properties, renovating and flipping them into either rentals or more upscale homes for sale to make a quick profit.
What's left for the starter-house hunter? Aging and weathered entry-level properties.
"When I was looking, I found homes that were pretty old, and I just thought they needed a lot of maintenance and upkeep," said Pilot. "It's just something that I wasn't committed to right now."
So, instead, she chose to invest in a newly built condo in Conshohocken, paying about $285,000, slightly more than she had hoped. Though it's a place Pilot sees herself in for the next five to seven years, there's only so much room to grow. The unit is a two-bedroom, and unlike a single-family detached home, cannot be expanded.
That's a trend that's spreading across Philadelphia — and the country — as few other alternatives have emerged.
"You are starting to see builders build with more density in communities," said Robert Dietz, chief economist at the National Association of Home Builders, adding that, nationwide, "townhome starts have been outpacing the overall single-family market."
In Montgomery County, for example, 72 percent of the more than 1,800 units built in 2015 were classified as attached or multifamily — the highest percentage ever, according to the county planning commission. And elsewhere in the suburbs, attached and multifamily units have been booming, too.
In Upper Merion and in Media, Delaware County, Toll Bros. has new townhouse units coming. In the former, the builder's Village at Valley Forge townhouses — with prices starting at $380,000 — join a slew of other attached and multifamily units under construction near King of Prussia. In Media, Toll has been experimenting with stacked townhouses — basically, split-levels — a move observers say can reduce price points and increase the number of occupants in a building.
For now, Delaware County builder Stephen Mantakounis said, townhouses can fill the starter-home void. He is awaiting final approvals for a townhouse community in Glen Mills, where the units are expected to list at about $370,000.
"Millennial buyers, they want new construction," Mantakounis said. "They don't want to go into an older home and fix it up."
As a result, he said, as long as single family-detached unit growth continues to languish, "there's going to be a big market for townhomes."