How to Bring Starter Homes Back from Extinction

If you want to understand why the American starter home seems to have gone extinct, don’t look at greedy developers, rapacious investors or discriminating banks. Look at the government policies that make building these homes all but impossible. New research puts hard numbers on one part of the problem — and they’re staggering.

To be sure, some of the concern over the struggles of first-time homebuyers is mistaken. Despite claims that their average age has skyrocketed since 2020, more reliable sources show that first-timers are roughly the same age as they were decades ago. Some of the trend away from smaller homes, moreover, simply reflects Americans’ preferences for larger homes and their greater ability to afford them, as well as shifting demographics and marriage patterns.

At the same time, there is demand for starter homes — defined as single-family homes with a below-average footprint and price — and they’re simply not getting built at the pace they once were. According to Freddie Mac, entry-level homes were 40% of new home construction in the early 1980s, but just 7% in 2019.

Federal, state and local governments have accelerated this decline by increasing construction costs through several channels.

Start with local permitting. A new paper from two economists at Princeton and MIT exploits a unique feature of the Los Angeles real estate market — a large and mature submarket for pre-approved land — to calculate how much builders are willing to pay to skip the permitting line (and thus the “price” of the permit itself). They find that pre-approved land sells for a 50% premium over comparable land that needs a permit, and that permitting constitutes roughly 36% of a developer’s total construction cost. This increases single-family home prices substantially.

Much of the cost is simply the time that it takes to secure the proper permits. For example, building a 30-unit apartment complex in LA takes twice as long as it does in Raleigh or Portland, Oregon; permitting alone accounts for 40% of total build time; and building is much faster on pre-approved parcels. (The authors find similar effects for single-family homes.) Simply accelerating LA permit approvals to the pace of lighter-regulated cities would reduce LA construction costs by 21%.

The Longer the Permit Process, the Longer the Building Process

In some cities, such as Los Angeles, the time it takes to get building permits amounts to almost half the construction time

Another new paper reinforces these conclusions for other localities. Examining new residential construction permits in 100 cities between 2000 and 2022, it finds that a one-month delay in permitting adds about $25,000 to the price of a home, translating to hundreds of thousands of dollars in extra costs in cities that take 18 months or more to issue a permit. Much of the delay, the paper adds, is linked to city council discretion over land-use decisions and electoral competition, thus suggesting political motivations.

This gets to another local government cost-driver: exclusionary zoning. Land in many localities is made artificially expensive by regulations that dictate home sizes, yard sizes, building setbacks, parking and more. The restrictions create a kind of “zoning tax” on residential land worth tens of thousands of dollars. And they effectively ensure that any builder who can afford to run the permitting gauntlet will have few cheap sites to build on.

Federal policies pile on more costs. Every new home in America comes with a hefty tariff surcharge thanks to an array of taxes on imported construction materials and home appliances. Canadian lumber, for example, is roughly 80% of all US imports and is currently subject to “trade remedy” taxes of more than 25%. Similar duties cover a wide range of products — pipes, nails, cabinets, wood flooring, plywood, sinks, shelving units, countertops, solar panels, etc. — that US homebuilders use every day. Atop these measures are “national security” tariffs that President Donald Trump imposed during his first and second terms: 50% on steel, aluminum and copper, for example, including products made from the metals, as well as 10% on wood and 25% on kitchen cabinets, vanities and upholstered furniture. Trump’s China tariffs and new “baseline” tariffs top it all off.

Tariffs Are Making Housing More Expensive

Many of the goods and materials used to make and furnish a new home are subject to tariffs

Research shows that these tariffs boost US homebuilding costs. Trade remedy actions, for example, increase construction material prices on an almost one-for-one basis. The National Association of Home Builders estimates that tariffs add thousands of dollars to the cost of building the typical new home, a point reinforced by both the Brookings Institution’s Tax Policy Center and the Center for American Progress.

Federal immigration policies increase construction costs even more. Immigrants constitute roughly a quarter of the US construction workforce and a third of all tradesmen. Deportation raids have hit sites in Texas, Florida, California, Pennsylvania, Louisiana and elsewhere, likely depressing construction employment and homebuilding in immigrant-rich areas. Higher costs are sure to follow: According to a 2022 study from the Federal Reserve Bank of St. Louis, pandemic-era declines in immigration contributed to higher costs for the US construction industry. An Obama-era deportation program was found to have done the same, and the researcher behind that study expects even stronger effects this time around.

Regulatory burdens discourage the construction of entry-level homes because they put homebuilders’ all-in costs — plus a reasonable profit — above the sales price they can safely charge entry-level homebuyers. The problem isn’t limited to notoriously costly places like LA, San Francisco or New York City. In parts of Minnesota, Michigan, New Jersey and North Carolina, for example, it’s effectively impossible for developers to earn a profit on building starter homes.

In each place, the numbers change but the math remains the same: Permitting, fees, land, utilities and other costs are basically fixed regardless of home size, while adding another room to a house is relatively cheap. Thus, a hypothetical builder can spend $372,000 on a 2,000-square-foot home that might sell for $400,000, or spend $500,000 on a 4,000-square-foot home that sells for almost twice that. It’s safer and easier for builders to hit profit targets by focusing on bigger, more expensive houses.

The decline of the American starter home is something that the Trump administration has targeted with new subsidies, mortgage interventions and a proposed ban on institutional investors. But if Washington really wants to encourage the construction of entry-level homes, the to-do list is straightforward: Roll back the tariffs, stop raiding the construction workforce and support local zoning and permitting reforms.

The evidence on what broke the US starter home market is clear. Less so is whether anyone has the political will to fix it.