This report examines the dramatic decline of entry-level housing in America—from 40% of new construction in the 1980s to just 7% today.
You’ll learn what caused this shift, how it’s changing the path to homeownership, and what it means for first-time buyers and the broader housing market.
Five Things to Know About This Trend
- In the U.S., starter homes plummeted from 40% of new construction in the early 1980s to just 7% by 2019.
- Builders now construct 65,000 entry-level homes annually compared to 418,000 in the late 1970s.
- Homes under 1,800 square feet dropped from 37% of new construction in 1999 to under 24% by 2021.
- Builders earn higher profit margins on large homes because fixed costs like permits and utilities don’t change with home size.
- Strict zoning laws and nearly $94,000 in regulatory fees (roughly 24% of a home’s price) make it harder for builders to price new homes for entry-level buyers.
Starter Homes Harder to Come By in 2026
For decades, the path to homeownership followed a predictable pattern. Buy a modest starter home, build equity, then trade up as your family and income grew.
But that pattern is fading.
The starter home—once the foundation of American wealth-building—is slowly but steadily disappearing from the U.S. housing market.
The numbers tell a stark story. In the early 1980s, starter homes made up roughly 40% of new home construction. By 2019, that figure had plummeted to just 7%, according to Freddie Mac.
To quote the Freddie Mac report:
“The main driver of the housing shortfall has been the long-term decline in the construction of single-family homes. That decline has been exacerbated by an even larger decrease in the supply of entry-level single-family homes, or starter homes.”
This isn’t a temporary fluctuation or a blip on the radar. It represents a fundamental restructuring of how homes get built in America.
What Is a ‘Starter Home’ Exactly?
Starters homes provide a kind of bridge for home buyers. These smaller, more affordable houses allow buyers to get a foot in the door of the real estate market.
While definitions can vary by region, the “classic” American starter home typically had these hallmark features:
- Smaller Footprint: Usually between 1,000 and 1,500 square feet in size (compared to today’s average of over 2,300).
- Simple Layout: Often a 2-bedroom, 1-bath; or a 3-bedroom, 1.5-bath configuration.
- Practical Amenities: Minimalist by design with a single-car garage, small galley kitchen, and a shared living area rather than dedicated “bonus” rooms.
- Entry-Level Prices: Historically priced at approximately 3x the median household income, making it attainable for a single earner or young couple.
The strategy was simple: buy small, build equity for 5–7 years, then use that equity as a down payment on a larger “forever home.”
The Dramatic Decline in Construction
Construction data shows how rare these homes have become:
- Late 1970s: Builders constructed approximately 418,000 entry-level homes annually
- 2020: That number fell to roughly 65,000—an 84% decline
- 1999: Homes under 1,800 square feet represented 37% of new construction.
- 2021: That share dropped to under 24%.
- Bigger Homes: The median size of new homes grew from around 1,500 square feet in the 1970s to roughly 2,300 square feet today. This has reduced the number of homes with an “entry-level” price point, because bigger homes cost more to purchase.
This construction shift has created a massive gap in the market. According to the National Association of Realtors, first-time buyers made up just 21% of all home sales in 2025—a staggering drop from the historical norm of 40%.
Also, the median age of first-time buyers has climbed to an all-time high of 40 years old, significantly older than the late 20s seen in previous decades.
In short: The American housing market hasn’t just become more expensive—it has physically outgrown the reach of the average first-time buyer.
The Resale Market Hasn’t Filled the Gap
The shortage of newly built starter homes would be less of a problem if there were enough existing homes to fill the void. But the resale inventory of affordable starter homes has also shrunk in recent years.
Homeowners who purchased at low interest rates (many in the 2-3% range during 2020-2021) are reluctant to sell and take on new mortgages at 6-7%. This “lock-in effect” has reduced inventory across all price points, hitting the entry-level market especially hard.
Why Builders Stopped Building Small
The steady reduction of starter homes stems from a combination of cost-related pressures and regulatory barriers that have made small homes unprofitable for builders.
1. The Fixed Cost Problem
New home construction involves substantial fixed costs that don’t change based on the size of the house.
Permit fees, utility connections, land acquisition, and site preparation cost the same whether a builder constructs a 1,200 square foot home or a 3,000 square foot home.
According to Robert Dietz, chief economist at the National Association of Home Builders (NAHB):
“It has become more difficult for younger households to attain homeownership, due in part to the difficulty building entry-level construction.”
It’s a numbers game. Profit margins on larger homes often reach 22% or more, compared to much thinner margins on smaller, entry-level properties.
2. Zoning Laws and Minimum Lot Sizes
Local zoning regulations have worsened the problem. Many cities have established minimum lot size requirements over recent decades, often requiring lots of half an acre or larger.
These rules are often used to preserve neighborhood character or limit density. But they’ve also made smaller, more affordable homes harder to build.
Here’s the problem: if land costs $100,000 per acre and zoning requires half-acre lots, that’s $50,000 just for the land. Builders can’t make money putting a modest home on expensive land, so they only build bigger, costlier houses.
3. Rising Construction Costs
Construction costs have increased substantially over the past two decades, mainly due to higher material costs, labor shortages, and increased regulatory requirements.
According to the NAHB, regulatory costs alone now add an average of $93,870 to the price of a new single-family home. That’s roughly 24% of the final sales price, on average.
These rising baseline costs create a “floor” below which it’s difficult for builders to make a profit.
If it costs a builder $250,000 just to construct the house before they even buy the land, it becomes nearly impossible to sell that home at a price first-time buyers can afford.
4. Builder Consolidation and Market Focus
The homebuilding industry has consolidated significantly in recent years. Large national builders now dominate the market, and they often focus on more profitable products.
In contrast, smaller local builders who once specialized in entry-level homes have been squeezed out by competition, regulatory costs, and limited access to capital.
The Effect on First-Time Buyers
The starter home shortage has created a ripple effect throughout the housing market as well as the broader economy.
First-time home buyers in particular could feel the impact.
With fewer entry-level options, many potential buyers are now renting well into their 30s and 40s. That’s a big shift from the 1980s and 90s, when the typical first-time buyer was in their late 20s.
According to the National Association of Realtors’ 2025 Profile of Home Buyers and Sellers, the median age for a first-time home buyer has climbed to an all-time high of 40.
This delay isn’t just a personal inconvenience. It fundamentally changes how Americans build wealth. Homeownership has historically been the primary wealth-building tool for middle-class families.
A Bifurcated Housing Market?
Today, in 2026, the U.S. housing market is largely split into two distinct segments:
1. Equity-Rich and Cash-Ready Buyers
This segment is dominated by all-cash buyers and individuals with significant financial reserves, such as real estate investors or older Americans leveraging equity from their current homes.
These buyers have a big competitive edge over “regular” first-time buyers because they aren’t affected by mortgage interest rates.
And there are plenty of them. Data from the National Association of Realtors shows that all-cash transactions accounted for 26% of all home purchases in 2024.
2. Struggling First-Time Buyers
On the other side of the divide are first-time buyers who typically lack existing equity and rely on traditional mortgage financing.
These buyers often make down payments averaging just 9% (and sometimes as low as 3%) and have to navigate a market with historically low inventory.
To find any level of affordability, these buyers often have to compromise by purchasing “fixer-uppers,” moving to less desirable locations, or accepting longer commutes.
Conditions Could Improve Going Forward
The good news is the current shortage of entry-level starter homes across the U.S. could improve during the next few years.
Recent reports show that home builders are starting to build more 2-bedroom homes than they build in previous years. That’s good news for first-time buyers.
Some builders have introduced product lines aimed specifically at first-time buyers. They include townhomes, smaller homes on smaller lots, and entry-level condos. They typically range from 1,200 to 1,600 square feet and cost less than traditional single-family homes.
Bottom line: Expect to see more entry-level inventory in the next few years. But these homes will likely be smaller and placed closer together than the starter homes your parents bought.