With a growing gap between supply and affordability, a new report from Cotality reveals the U.S. housing market is seeing a significant shift in what defines a “starter home.” Once characterized by modest new builds on the outskirts of town, the starter home is now more likely to be an older, smaller property — and it’s commanding a premium.
Supply Constraints and Shrinking Affordability
The U.S. housing market continues to grapple with a critical shortage of homes. While new construction is attempting to address the estimated 4-million-unit supply gap, the high cost of building materials, land, and labor is pushing prices out of reach for many buyers. As of April 2025, the median price for a new home stood at $430,000. This has had a tangible impact on new home sales. In the first four months of 2025, sales of new homes dropped by over 20% per month, now comprising only 12% of all home sales — a noticeable decline from 16% in early 2024. Meanwhile, appreciation rates tell a similar story: since 2023, existing homes appreciated by 11%, while new homes appreciated by just 6%.
The Shift Toward Older, Smaller Homes
With fewer new homes being purchased, buyers are turning to older, smaller properties. Although existing home sales dipped by 5% in Q1 2025, they still far outpaced new home purchases. Notably, about 70% of existing homes sold were under 2,000 square feet, compared to newer builds, which tend to offer more space. Even among newly built homes, a trend toward smaller footprints is emerging. Data shows that the average size of a new home has declined by 10 square feet annually over the last five years. This downsizing trend benefits both buyers and builders—smaller homes generally cost less to maintain and offer lower utility expenses, while builders can reduce material costs and construct closer to urban centers. However, despite shrinking sizes, affordability challenges persist.
Investor Activity Complicates the Market
The market’s affordability crisis is being compounded by investor interest. Southern cities like Dallas and Houston are leading in new home sales — and also in investor purchases. Small-scale landlords, in particular, purchase properties that would otherwise be accessible to first-time buyers. Investors aren’t just focused on new construction but also on older, smaller homes. This competition further squeezes available inventory for traditional buyers. For example, in Los Angeles, 42% of purchases in 2024 were made by investors. Areas like San Francisco, Riverside, San Diego, and San Jose reflect similar dynamics, with high investor presence but little new construction.
Renting Becomes the Default
With limited options and high prices, many would-be buyers turn to renting — often out of necessity rather than choice. Rents rose 3.7% over the past year, adding financial pressure on households trying to save for a down payment in an already tight market. Meanwhile, current homeowners remain in place, benefiting from historically low mortgage rates. This behavior contributes to inventory stagnation, resulting in what analysts call buyer “gridlock.”
A New Reality for Entry-Level Buyers
The traditional path to homeownership—buying a modest new build as a first home—is becoming increasingly rare. The modern starter home is likely a decades-old structure, still relatively small, still relatively expensive, and subject to intense competition. With limited affordable options and increased investor interest, the scales continue to tip toward renting. As land becomes more expensive and new developments become less accessible, the market is shifting, and for many, the route to building wealth through homeownership is slipping out of reach.
