My wife and I are looking for our first home. We live in a somewhat high-cost area of the Northeast, so most of the houses we see in our price range need a lot of work or are in bad school districts or neighborhoods. Many people have recommended that we just get a townhouse or condo (which would be easily affordable for us) as a "starter home" and then sell that house to get a single-family home in a few years.
This advice has never struck me as very good. It seems like advice that might have been more relevant in the housing bubble. Part of my problem with this is that townhouses seem to be really difficult to sell. When I look at townhouse listings in my area, I see lots for sale in each development. One development has twenty active listings. Other developments include a lot of units that people are offering as rentals. Single-family homes, on the other hand, sell within days or weeks.
Further, among my family and my friends, I know four people who bought townhouses: only one of them was actually able to sell the home and upgrade. Two of them bought townhouses when they were single; when they married, they were unable to sell either, so they have to live in one and rent the other out, even though they could afford a nicer single-family home on their combined incomes. Another tried to sell his townhouse after living in it for almost ten years; he ended up finding no buyers, so he still owns the home and has moved out and lets an elderly family member live there.
On top of that, the starter home strategy doesn't seem to pay a lot of attention to real estate commissions and other transaction costs on the sale of your starter home. To keep the numbers simple, let's say I buy a $300,000 townhouse. The real estate commission to sell that home is going to be between $15,000 and $18,000. So in order to actually save any money toward my goal home, I have to increase my equity in the house (through appreciation and mortgage payments) by MORE than that amount. Given that townhomes seem to be bad at appreciation, that means if I assume the worst (no appreciation at all), I need to live in the townhouse for four to six years just to break even. Now throw in the closing costs on the original purchase - in my area, that would total up to at least $5,000, which makes the situation even worse. Basically, it sounds like this will make it a lot more difficult to get a single-family home - the $20k - $23k in extra costs are just another barrier between me and the down payment on the single-family home I want - and that's all assuming I don't become one of the poor people who can't sell their townhouse at any price.
Am I wrong? What am I missing here?