Starter homes are becoming a battleground between millennials looking for their first house and investors swooping in with all-cash offers — and there's a pretty clear winner

  • Real-estate investors are purchasing 20% of thestarter homes on the market,reported Ben Casselman and Conor Dougherty for The New York Times.
  • They’re outbidding other buyers by paying in cash, and some are buying houses before they’ve even been put on the public market.
  • It’s tough competition formillennials, who already struggle with buying their first home because of high housing prices and a shortage of starter homes.
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Starter homes are scarce. In 2018, they represented just 20.9% of available housing inventory in the US,according to Trulia.

The US housing market iscurrently a seller’s market— this causes home prices to shoot up, leaving minimal inventory at the middle and low ends, Spencer Rascoff, Zillow’s CEO,previously told Business Insider. But there are other factors driving the shortage, too: rising construction costs, restrictive zoning rules, and changing consumer desires,reported Ben Casselman and Conor Dougherty for The New York Times.

That spells bad news for millennials who are alreadyfinancially behind because of a higher cost of living, student loan debt, and a fallout from the recession — looking to buy their first home. And real-estate investors are only making the problem worse.

In 2018, investors bought roughly 20% of US starter homes (homes priced in the bottom third of the local market) — twice that of 20 years ago, Casselman and Dougherty wrote, citing real-estate data provider CoreLogic. In the most popular markets, they bought nearly 50% of the most affordable homes and 25% of all single-family homes.

Some investors flip the houses, others rent the houses out, and some resell the houses when they appreciate, which could take weeks or years, they reported. A growing number of hard-money lenders are helping their endeavors, and “in some cases, wholesalers make unsolicited offers on properties, then flip them to investors without putting them on the public market,” Casselman and Dougherty wrote.

Read more:Millennials are making 3 key decisions that are wiping out the starter home — and it’s changing what homeownership in America looks like

Millennials face another challenge on the track to homeownership

The investors are tough competition for millennials, who are losing territory in the battleground of starter homes that they already can’t afford.

Millennials buying their first home today willpay 39% more today than they would have nearly 40 years ago,according to Student Loan Hero. Areport by SmartAsset found that in some cities, the median home outweighed the median income by so much that it could take nearly a decade to save for a 20% down payment.

Read more: Here’s the salary you’ll need if you want to afford a mortgage in 17 major US cities

And some of those who have saved enough to buy are forced to wait — and up their budgets — as they continuously lose out on potential homes to the cash-paying investors.

Fatou Ceesay, age 38, told Casselman and Dougherty she’s spent two years losing bids to cash buyers. Some sellers are requiring cash, while some listings quickly disappear only to pop up again several weeks later at a higher price, she said. She’s since increased her budget from $300,000 to $350,000.

Millennials’ inability to get their hands on their first home in the face of tough economic conditions and a cutthroat market is creating new trends.

For one, thing, asBusiness Insider previously reported, millennials are resorting to renting for a longer time. Someunmarried millennial couples are buying homes together before getting engaged just so they can split the cost of buying a home. And others are delaying homeownership so long that by the time they do buy, they’ve saved enough money tobuy a luxury home, bypassing the starter home stage altogether.

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