Millennials are making 3 key decisions that are wiping out the starter home — and it’s changing what homeownership in America looks like

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Millennials are making three key decisions that are cumulatively wiping out the starter home.
The typical millennial is renting longer and buying later, surpassing the need for the starter home.
A delay in homeownership gives millennials more time to build wealth — which means that for some, their first home is a million-dollar luxury home.
Some rich urban millennials prefer to rent in the city and buy a vacation home instead of a primary residence.
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Millennials are known for wiping out industries — and the starter home may be next.

First-time homebuyers needed 23% of their income to afford an entry-level home in the second quarter of 2018, an increase of 2% compared to the previous year, according to The Real Deal. The median price of previously owned homes was $264,800 — the most expensive it’s been in a decade.

For millennials across all income levels, a more expensive real-estate market is at the root of how they’re wiping out the starter home — and it’s unfolding in three key ways.

1. They’re renting longer and buying later.

Millennials are waiting longer than ever to buy homes.

"The whole real-estate industry now is characterized by extreme scarcity and inventory," Spencer Rascoff, Zillow’s CEO, told Alyson Shontell, Business Insider’s US editor-in-chief, during a 2017 episode of "Success! How I Did It."

Two years later and it’s still a seller’s market, according to Zillow. This causes home prices to shoot up, leaving minimal inventory at the middle- and low-end of the housing market, Rascoff said: "As a result of limited starter-home inventory, [millennials] are renting longer."

Homes are 39% more expensive than they were nearly 40 years ago, according to Student Loan Hero. A report by SmartAsset revealed that, in some cities, the average home outweighs the average income by so much that it can take nearly a decade to save for a 20% down payment.

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Fewer 25-to-34-year-olds are also living with a spouse or partner, Business Insider’s Akin Oyedele reported, citing Census Bureau data. That suggests milestones like marriage, which often precipitate buying a home, are happening later.

Student debt has also hit an all-time high, making it harder to take out a mortgage.

By the time many millennials do buy homes, they’re older and less likely to move around as they settle down. They’ve also had more time to build wealth, which means they might be able to afford higher-end homes.

2. When they do buy, they have their eye on luxury homes.

"When [millennials] buy their first home, they’re buying a much nicer home than a prior generation," Rascoff said.

He added: "I mean, many people are basically skipping starter homes; they’re renting until their 30s, and that first house they buy is a million dollars, and they just are not even buying the $200,000, $300,000, $400,000 home, which is a total mind shift as compared with previous generations. So they’re still buying homes — they’re just buying them later and buying them bigger."

Toll Brothers Inc., the largest US luxury-home builder, said that nearly a quarter of its 2017 sales were to those aged 35 or younger, reported Prashant Gopal of Bloomberg.

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"These people, who may each have 10 years of work under their belts, can afford a first home that is more luxurious than what one thinks of as the typical starter home," Fred Cooper, senior vice president of investor relations at Toll, told Gopal.

Megan McGrath, analyst at MKM Holdings, said these buyers are the oldest of millennials, but more will come, Gopal wrote.

"Part of it is generational — millennials didn’t feel the need to buy a starter home, and maybe couldn’t and they waited until they were in their 30s," she said. "Maybe now they’re just skipping over the starter home and buying a higher-priced alternative."

Source: Millennials aren’t buying starter homes — they’re splurging on million-dollar places instead

3. They’re buying vacation homes instead.

Then, there are wealthy, city-dwelling millennials to consider, some of whom buy vacation homes before, or in lieu of, a permanent home

They’re renting in the cities, but buying country houses, reported Farran Powell of The Street.

Carl Shepard, cofounder of HomeAway, told Powell there’s a big increase in millennials entering the vacation home market. Those in their late 20s and 30s are buying vacation homes to build wealth, he said — they rent them out part-time when not residing in them.

Shepard encourages his 25- and 30-year-old kids who live in San Francisco to buy a vacation home instead of a primary residence, according to Powell.

"San Francisco is so out of reach for the average person, but Big Sur isn’t and certain parts of Sonoma [aren’t]," Shepard said. "The notion of buying your second home first is a wealth building activity."

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It’s an investment move in costly cities like San Francisco — where median-priced homes sold for $1.6 million in 2018 — and New York City.

In 2015, New York started to see a swing in urbanites seeking vacation homes in the Hudson Valley, due to rising rents that make it hard for working young people to save a substantial down payment for, reported Michelle Higgins for The New York Times.

"For less than $350,000 — an amount that barely buys a studio in brownstone Brooklyn these days — they are finding that they can afford homes with three bedrooms or more on several acres of land, sometimes on lakefront property, or with a pool," Higgins wrote.

As first-time homebuyers consider second homes, they’re bypassing the starter home in the process.

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Source: Business Insider – hhoffower@businessinsider.com (Hillary Hoffower)