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Why Builders Aren’t Building Starter Homes — and What That Means in 2026
I’m one of the most optimistic people I know when it comes to real estate.
I’ve spent decades believing that housing problems get solved—eventually—by innovation, capital, and demand.
But the affordable housing problem isn’t behaving like most real estate challenges, and that has me genuinely concerned heading into 2026. This concern isn’t theoretical. It shows up in what builders are actually producing—and what they aren’t.
If mortgage rates ease and home sales pick up in 2026, something’s got to give on the supply side. But don’t expect new home construction — especially affordable homes — to suddenly solve the housing shortage.
Here’s the likely construction picture for 2026 and why the starter-home gap will continue to widen.
The Current Build Landscape
Builders are building — but not where the shortage is most painful.
According to recent housing data:
Single-family housing starts recently averaged around 1.0–1.2 million units annually, elevated compared with the past decade but still below long-term demand.
Meanwhile, permits for single-family homes eligible for starter home budgets remain far lower than needed.
The result? Most construction activity is concentrated in higher-end product — luxury or move-up homes — because that’s where margins cover rising development costs.
The Real Cost Problem: Land + Entitlements
The issue isn’t builders not wanting to build starter homes — it’s that the raw cost of turning vacant land into a buildable lot has ballooned.
Recent industry estimates show lot development costs averaging $100,000–$230,000 per lot nationally, with coastal and high-regulation states well above that range. In California, for example, one builder association pegs average lot costs north of $350,000 once entitlements, impact fees, and infrastructure are included.
Those costs are fixed before a single stick of framing goes up. So no matter whether the eventual house is priced at $350K or $700K, the builder’s cost base is prohibitive for entry-level production.
Add to that:
Environmental reviews
Lengthy entitlement processes
Impact fees and inclusionary zoning
Traffic, school, and sewer mitigation fees
…and suddenly a “starter home” no longer makes financial sense for many builders.
Why 2026 Won’t Change That
In 2026, the drivers that could unlock construction just aren’t likely:
1. Regulations aren’t going away
Local governments have not shown systemic willingness to reduce the rules that make lot creation expensive. And where reforms happen, they’re often incremental.
2. Labor and materials remain sticky
Even if rates drop and demand rises, builders still face shortages of skilled labor and higher costs for lumber, steel, and concrete because supply chains and wages haven’t normalized.
3. Capital chases the best returns
Financiers increasingly fund projects with predictable margins — luxury subdivisions or large-lot communities — because that’s where profit is more assured.
That means affordable starter homes — the ones under $350K in most markets — remain the hardest to build.
Prediction: 2026 Construction in Focus
Here’s the likely scenario:
✅ Total new home completions increase modestly — largely because of projects already in the pipeline from 2024–25.
🔹 Permits for larger homes continue to outpace starter home permits.
🔹 Starter home construction remains constrained by fixed land development costs.
So, for 2026 you should expect:
Overall housing starts modestly higher year-over-year
New construction concentrated at higher price points
Starter homes still in short supply
In short:
New home construction improves, but the affordable starter segment does not.
Why That Matters for Investors
This dynamic matters more than most casual forecasts acknowledge because:
Supply won’t catch demand at the low end.
That means rental demand stays strong for entry-level households priced out of ownership.
Appreciation patterns get skewed.
Higher-end homes may appreciate faster, but entry-level properties stay tight, supporting solid cap rates and long-term pricing.
Opportunity exists in subdivision play.
Investors who can aggregate lots and solve entitlement hurdles stand to win where single builders can’t.
As you’ve said for years: If someone figures out how to profitably deliver starter homes — real starter homes — they’ll make a fortune.
I’ve never changed my mind on that.
I rarely open my calendar for one-on-one sessions.
As we head into year-end, I’m opening 10 private strategy calls for real estate professionals and small business owners who want clarity going into 2026.
Click here for more information and to schedule a call.
