In this Month's Builders Outlook

New generation of home buyers eschew starter homes for more permanent options

A growing number of Gen Z and millennial renters are rejecting the traditional idea of buying a modest "starter home" as a first step in building wealth.

Instead, many are holding out to purchase a more permanent residence that better suits their long-term needs, marking a generational shift in how younger Americans think about homeownership. The move away from starter homes is reshaping demand in the real estate market. Builders who once targeted first-time buyers with lower-cost, smaller homes may now need to adjust their strategies. With affordability concerns and mortgage rates still high, more young adults are skipping that initial step entirely and waiting longer to buy homes that they plan to stay in.

According to the BMO Real Financial Progress Index, 66 percent of Gen Z renters and 61 percent of Millennial renters agree that buying a starter home and upgrading later "makes no sense anymore."

The data suggests that young adults no longer view homeownership as a multi-stage process, and they are skeptical of the financial value in purchasing a smaller home only to sell and move again in a few years.High home prices, low inventory, and elevated interest rates have made it difficult for younger generations to follow the traditional housing path.

At the same time, many entry-level homes that once served as starter options have been bought by investors or priced out of reach. In places where starter homes are available, they may require major renovations or be located far from work and amenities.

The survey found 69 percent of Gen Z renters and 74 percent of Millennial renters who intend to buy a house are waiting for interest rates to drop before making a purchase decision.

With economic uncertainty still weighing on younger buyers, the long view may be the only one they're willing to take. Roughly 61 percent of Americans say they feel less confident they will own a home in their lifetime than they were five years ago, according to BMO.

For non-homeowners with children, 57 percent of those polled by BMO say that saving for education or childcare is a more important financial priority than buying a house. Gen Z has also prioritized buying a car (50 percent) while millennials are looking to save for retirement (54 percent).

The starter home may become a relic unless affordability improves. Builders and lenders may need to shift toward products that support long-term ownership from the start. "Down the line, younger generations will put off buying homes much longer and be resigned to renting," Thompson said. "This has more than just an impact on housing, this will have impacts on marriage rates and birth rates as people will not only hold off home purchases, but also delay starting families."

See more industry news in this month's Builders Outlook.