By John Pullega – 2-10 Writer & Home Warranty Advocate | Updated July 24, 2025 | Published June 15, 2023
Many builders are shying away from starter homes due to a variety of factors that make them less profitable. Despite this, high demand for these properties makes them a sound investment in certain markets. If you’re considering your options, understanding the current trends can help guide your decision.
Plummeting Inventory Is a Problem
Since 2008, housing inventory has been scarce. Limited availability has pushed starter home prices upward, making them increasingly unaffordable in several popular markets, including Tacoma, San Diego, San Francisco, Sacramento, Portland, Miami, Los Angeles, and Denver. While America faces a housing shortage at all income levels, starter homes are especially scarce, leaving many first-time buyers sidelined despite their desire to purchase.
Why Aren’t Builders Making More Starter Homes?
Even with high demand, builders often hesitate to construct starter homes for several reasons:
- High land costs: Many high-quality lots are limited, and entry-level lots tend to be less prioritized, keeping prices high.
- High fees: Infrastructure and service costs in entry-level communities can add 20–25% to the final home price.
- Shifting buyer priorities: First-time buyers are waiting longer to marry and pay down debt, meaning they may not settle for basic homes that simply reduce rental expenses.
Is There a Good Reason to Build Starter Homes?
Despite builders’ hesitation, the next generation of home buyers may change the equation. Rising rent costs are motivating Millennials to invest in homes, building equity rather than continuing to rent. This demographic, aged 18–36, represents the largest population group today. Builders should evaluate starter home profitability by region, especially where first-time buyers are most active, like the Midwest.
Starter homes can be a win-win: they meet the needs of first-time buyers while offering developers a strong return in areas of high demand. For communities, increasing the availability of affordable starter homes contributes to healthier housing markets and stronger local economies.
Read the full Redfin report here: Making the Case for Building More Starter Homes
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