What Is a Starter Home? The Small, Affordable Houses That Weren’t Being Built Anymore—Until Now

Owning a little house on a plot of land is synonymous with the American dream—a sign of prosperity and social mobility.

Affectionately known as the starter home, it was seen as the first rung on the property ladder and tended to be smaller and less expensive.

"Conceptually, a starter home is one that is purchased by a first-time homebuyer with the goal of getting a foothold in homeownership," says Realtor.com® Chief Economist Danielle Hale.

Today, affordable homes are hard to come by, and experts agree that reviving the starter home may be the only way to get the housing industry back on track.

The history of the starter home

The first starter homes in the U.S. were small two-bedroom houses with one bathroom and few frills.

They were mass-produced by builders such as William Levitt to meet a severe housing shortage after World War II. Veterans were returning home from the war, marrying, and starting families, and hundreds of thousands of people needed a place to live.

By 1947, Levitt, who had mass-produced Army barracks during the war, was churning out small homes on Long Island, the first of seven Levittowns in the U.S. and Puerto Rico. Other developers in other areas soon followed suit.

As part of the GI Bill, some veterans for the first time became eligible for a government-backed home loan with no money down. So the tract home, designed in cookie-cutter fashion and produced assembly-line style, sprang up to meet the demand.

What defines a starter home—size, cost, or both?

The first starter homes were small—from 800 to 1,000 square feet. They were boxy, with a pitched roof, an old-style open floor plan, and a plain interior with no decorative molding.

"A starter home is usually smaller and lower-priced and might be a home that a buyer expects to outgrow in a handful of years," says Hale. "But the idea behind purchasing one is to experience homeownership and start to build up equity that can be used later to trade up into a bigger home."

In the 1940s, homes were affordable, making climbing the rungs to wealth building through property possible. In 1947, starter homes cost between $8,000 and $12,000. That's $109,000 to $168,000 in today's dollars.

Where is today's starter homes?

In recent years, there hasn’t been enough supply to meet the demand for starter homes.

The hope is, however, that the numbers will start to swing in a positive direction, given the housing bill that just passed and other new-construction initiatives.

A starter home is defined by Realtor.com economists as any listing priced below $350,000 nationally—or below 80% of a local market's median list price. (For example, in Phoenix, where the median asking price sits at $489,500 as of June, the starter home threshold is roughly $391,200.)

Today, there are 220,000 more starter homes for sale than there were four years ago, and prices are down 4.2%. 

Meanwhile, a growing number of states are moving to ease local zoning laws to encourage the construction of more starter homes.

Idaho, Connecticut, and Colorado lawmakers introduced bills aimed at statewide changes to local zoning laws, joining at least eight other states that are currently deliberating on similar bills.

But while the pool of starter homes may no longer be shrinking, the price for one  has been increasing at a steady pace all the same. 

When mortgage rates are factored in, qualifying for a starter home now requires a household income of around $78,000, up from just $43,000 seven years ago, according to recent Realtor.com data. 

According to recent LendingTree data, just 37.6% of renters in the U.S. can afford a starter home, even with lowering the average price for starter homes to $200,000.

They found there was a handful of Southern states that currently offer the best opportunity for renters to make the leap to homeownership with a starter home, including Mississippi, West Virginia, Arkansas, and Alabama.

Roadblocks to building starter homes

Many factors affect the feasibility of a builder churning out small, affordable homes, including the costs of land, labor, and materials.

"But the biggest barrier has to do with zoning laws and building codes," says Eclipse Cottages CEO Justin Draplin, who is developing communities of green tiny homes in South Carolina. "Most 1,000-square-foot units are stacked onto each other and developed as apartment complexes."

There are still approximately 300,000 fewer low-cost listings now than there were in 2019, and the typical starter home comes with a nearly $90,000 premium, according to the latest Realtor.com reporting.

Thankfully, the newly enacted 21st Century Road to Housing Act aims to fast-track building projects by streamlining environmental assessments. By modifying current National Environmental Policy Act requirements, the legislation permits the Department of Housing and Urban Development to hand over oversight responsibilities to local and state authorities.

Still, Joel Berner, senior economist at Realtor.com, says it's unlikely we'll feel much impact from the reforms this year.

"It could take years for a meaningful uptick in production to materialize and longer for it to have any impact on overall affordability," Berner says.

How to find a starter home

Starter homes aren't being built like they used to be, but they are still out there. And keep in mind, "a starter home for one buyer may not be a starter home for another buyer," notes Hale.

"Picking out a starter home generally involves looking for smaller, more affordable homes," adds Hale. "Some researchers define this by lower bedroom counts or square footage, while others might look at pricing—either the actual dollar cost or the cost of a home relative to some local area norm."

So when you are searching for a home, start small. Look for homes well within your budget with minimum bedrooms.

Or go tiny instead of a starter

To address the need for today's starter homes, many states have been teaming up with the U.S. government to combat NIMBY opposition (a "not in my backyard" trend to describe neighbors who fight nearby development) by offering tax breaks and builder incentives or by overriding zoning restrictions.

In addition, eight states have recently passed laws allowing an accessory dwelling unit, or ADU, to be built on a single-family residential lot, and more states have initiated similar laws. An ADU is essentially a second, smaller home built behind the primary home.

Some buyers would even happily go smaller. You can see this in the staying power of the tiny-house movement and the popularity of shows such as "Tiny House Nation."

"There is a growing movement toward smaller, more sustainable homes," says Draplin.

The homes his company is developing come with a land lease, similar to a mobile park model, and the community amenities include things like a dog park and a bike path into town. The largest cottage is 400 square feet, with the option to expand it by adding a loft and porches.

Demand for small, sustainable, newly built homes is strong, according to Draplin.

"Many individuals and families, including young professionals, are actively seeking out smaller homes," he adds.