Is the American Dream Shrinking?

The 2025 home buying season is fast approaching, but first-time home buyers are finding the landscape for starter homes increasingly barren. Once a launchpad for homeownership, this category of properties—typically defined as homes under 1,400 square feet—has become scarce across the U.S., driven by complex interplays of economic, regulatory, and market forces.

In 2023, only 9% of newly constructed homes were under 1,400 square feet, a staggering drop compared to 40% in 1982, according to U.S. Census Bureau data. This shift signals significant challenges in the housing market and has made the traditional starter home definition irrelevant for many potential buyers.

Restrictive zoning laws enforced at the local level have exacerbated this issue, limiting where and what types of homes developers can build. "It's simply become too expensive to build starter homes," says Sam Khater, chief economist at Freddie Mac. These restrictions have driven up the cost to build homes by inflating construction costs and delaying project approvals, leaving homebuilders to prioritize high-margin luxury homes over entry-level options.

The rising price of materials and labor has increased by 50% over the past decade, with the cost of land skyrocketing at an even higher pace—up 250%, according to Selma Hepp, chief economist at CoreLogic. The combination of rising construction costs and limited land availability has amplified financial challenges for developers, forcing them to reduce focus on new home construction at the entry level.

Moreover, supply-side issues in the housing market are driving up home prices. From early 2020 to late 2024, home prices increased by over 52%, as per the S&P CoreLogic Case-Shiller U.S. National Home Price Index. Meanwhile, existing homes for sale remain locked up as homeowners cling to their properties secured at pre-pandemic low mortgage rates. With rates hovering near 7% today, many are reluctant to sell or trade up, further tightening the housing supply.

The challenges are perhaps most striking for approximately 3 million potential first-time buyers in the U.S. As home prices rise and inventory dries up, an increasing number of buyers are unable to enter the market. "We are seeing an all-time low of first-time home buyers paired with an all-time high of all-cash buyers," reports Jessica Lautz, deputy chief economist at the National Association of Realtors.

This imbalance is starkly reflected in the new median age of home buyers, with the average first-time buyer reaching 38 years old in 2024, up from an average of just 29 in 1981.

The long-term decline in starter home construction accelerated following the 2007-08 financial crisis as the homebuilding industry consolidated. Despite a demand rebound, annual rates of new home construction remain significantly below pre-recession levels, leaving the supply-demand gap wider than ever.

While increased housing affordability measures and reforms in zoning laws could help alleviate these issues, they aren't quick fixes. For now, a constrained housing supply paired with elevated home prices continues to push first-time home buyers out of the market, redefining the contours of the American dream.

As we enter another pivotal home buying season, the disappearance of starter homes underscores deeper structural issues in the U.S. real estate landscape—issues that demand more than short-term policy solutions to fix.