A starter home can be a solid investment, whether you purchase that property to live in or rent out. But is now a good time to sell a starter home? It depends on whether you're a regular homeowner or an investor and what your plans entail.
Starter homes and today's housing market
Starter-home construction slowed down prior to the start of the pandemic. In 2019, the majority of newly constructed homes consisted of upper-tier housing costing at least $500,000, according to a report by Mansion Global, citing data from Realtor.com. And in 2018, starter homes represented just 20.9% of available homes on the market, according to Trulia.
Meanwhile, high construction costs could lead to a shortage of newly built starter homes in the coming year. Soaring lumber prices have added a whopping $24,386 to the cost of a newly constructed single-family home since mid-April 2020, according to the National Association of Home Builders.
Throw in the fact that housing inventory is low in general, and it's easy to see why buyers may be clamoring for starter homes. In late January, there were only 1.04 million homes available for sale, representing a 26% drop from one year prior. All told, that amounts to a 1.9-month supply of listings, which clearly gives sellers an upper hand in today's market across all home tiers. In fact, the median price of an existing home that sold in January was $303,900 -- a 14.1% increase from January 2020.
Selling a starter home as a noninvestor
If you own a starter home, listing it now could mean walking away with a high sale price. But here's the problem: If you sell one home, you'll still need a place to live, so what you gain by commanding a premium for your home, you might lose by paying up for another one.
That said, if you're looking to unload a starter home and aren't in a rush to buy another home, selling now could work to your advantage. You could sell your home, pocket a large profit, rent a cheap home for a year or two, wait for the housing market to cool off, and then buy another home once prices fall.
Selling a starter home as an investor
As is the case with a noninvestor, if you sell a starter home, pocket a nice profit, and use that money to add another property to your portfolio, what you gain in the sale of your first home, you'll lose in the form of paying up for another. As such, you may want to hang on to that starter home despite being able to unload it at a premium.
Right now, there's loads of demand for affordable housing, so if you retain that starter home, you may be able to not only rent it out with ease but rent it at an attractive price -- for you. Furthermore, once coronavirus protections like mortgage forbearance come to an end, there could be an added surge in rental demand as homeowners who aren't recovered financially opt to walk away from their mortgages. Those people will need a place to live, so we could see an uptick in demand for smaller rental homes in the near term.
The Millionacres bottom line
Of course, whether you're a regular homeowner or an investor, there are pros and cons to selling a starter home today. The key is to weigh your options and understand what the market looks like. A dearth of starter homes could really work to your advantage, but if you're unloading one to upsize, make sure you can afford a larger home -- whether you plan to live in it yourself or rent it out to generate income.