The Starter Home Is Gone—Now America Is Losing the Starter Rental, Too

America has spent years mourning the death of the starter home, and with it, the dream of homeownership. But for young adults today, the housing crisis began much earlier—with the disappearance of the starter rental.

Before most people get a mortgage, they need that first lease: the cheap studio, rented room, or shared apartment that makes it possible to leave home and start saving for whatever comes next.

"Entry-level rentals are the first rung of the housing ladder," explains Jiayi Xu, economist at Realtor.com®. "An affordable entry-level rental gives a young household the financial breathing room to build savings, establish credit, and accumulate the down payment that makes homeownership possible."

As recently as 1990, nearly half of U.S. rental units cost less than $600 a month after adjusting for inflation, according to Harvard’s Joint Center for Housing Studies (JCHS). By 2017, that share had fallen to just one-quarter of the rental stock.

The starter rental was never glamorous, and perhaps that’s why it slipped away without fanfare. But its disappearance has massive implications for the U.S. economy and the future of generational wealth.

As Xu puts it, "When that rung [of the housing ladder] is missing, the entire climb becomes harder."

The death of the starter rental

While the starter home generally conjures up a familiar image of a simple one- to three-bedroom house, it’s harder to pin down the equivalent image of a starter rental. Functionally, it’s that first affordable lease, but there's never been one version of what that looked like.

That's partly because homebuyers tend to bring a more standardized financial profile to the table. In 2025, the median age of first-time homebuyers was 40, with a typical FICO score of 735 and enough savings to cover a 10% down payment.

A first-time renter, by comparison, fits no single mold. It might be a student with no work history, an early-career worker, an immigrant, or someone who just moved to a new city.

Because of that, the entry-level rental market has historically taken many different forms. But in recent years, it's started to look more homogenous, often taking some form of apartment living.

To make that model work, a first-time renter usually needs either enough money to live alone or enough connections to live with other people. Sometimes it works, but it's not especially flexible.

Throughout the 20th century, though, a starter rental could also be a single-room occupancy unit, residential hotel, or boarding house. These low-cost micro-units gave a wide range of people with limited income or limited connections a way to live independently. For as little as the equivalent of $100 to $300 a month today, residents could rent a private room with access to shared bathroom and kitchen facilities.

SROs were especially common in major metropolitan hubs such as 1950s New York City, where they accounted for roughly 10% of all rental units. Today, they make up closer to 2%.

So, where did all these affordable options go?

Poor maintenance and deteriorating living conditions led many cities to phase out and demolish SROs. Pew Research found that more than 1 million such units were destroyed or converted to other uses from 1970 to 1980 alone. And if new construction of SROs had kept pace with the rest of the country’s housing stock, we'd have 1.5 million more such units today.

But SROs are only one part of the story. Their demise reflects a single piece of a broader pattern of cities losing, banning, or otherwise failing to replace many of the modest, low-cost housing forms that once made independent living possible for people at the beginning of their adult lives.

From 2014 to 2024, the number of rentals under $1,400 fell by 9.3 million units, while the number renting for $1,400 or more increased by 11.8 million units, according to Harvard’s 2026 rental housing report.

The household formation bottleneck

Just as someone is learning to live on their own, they're also forming a new household—that is, creating a separate living arrangement instead of remaining part of someone else’s. This decision ripples through the economy in ways big and small.

"Entry-level rentals are an economic recruitment tool," explains Xu. "Markets that maintain accessible rents attract and retain young professionals at the earliest and most mobile stage of their careers."

But when cities lose these affordable options, it fundamentally alters their economic trajectory.

"When cities lose their entry-level rental stock, they don't just lose affordable housing," says Xu. "They lose the conditions that make young household formation possible in the first place—and with it, the workforce pipeline that sustains long-term economic growth."

Research from Realtor.com shows how this geographic shift is playing out in real time.

Instead of flocking to traditional hubs of innovation and ambition like New York City, Los Angeles, and San Francisco, young adults are concentrating in midsize markets such as Colorado Springs, CO, Austin, TX, and Denver. These smaller markets offer something the coastal giants don't: a place where a competitive job market and manageable rent coexist.

And when the very housing required to launch that independence becomes unavailable, it creates its own drag on household formation itself.

Economists Daniel Cooper and María José Luengo-Prado measure young-adult household formation through its inverse: living with parents (LWP). As they put it, “a higher share of LWP corresponds to lower household-formation rates.” 

Their research found that housing costs and business-cycle conditions explain up to 70% of the difference in household-formation rates across two cohorts of young adults in 1979 and 1997—well before the worst of the current housing affordability crisis.

More recent research points in the same direction. Housing scholar Arthur Acolin found that as housing becomes less affordable, more young adults live with their parents—and delay that crucial milestone of moving out.

The impact isn't limited to expensive metros.

JCHS projects that the U.S. will add about 8.6 million households from 2025 to 2035, or roughly 860,000 per year. That would be less household growth than in any of the past three decades, including the already sluggish 10.1 million households added in the 2010s.

From 2035 to 2045, JCHS projects growth will slow even further, to just 5.1 million households—the lowest rate of growth in at least 100 years.

Could the starter rental make a comeback?

It’s not all bad news. The sheer scope of this bottleneck has sparked a growing movement to bring back the humble starter rental.

States across the country are moving to legalize SRO development, proposing and passing laws that allow co-living and micro-units, or overturning bans that arbitrarily restrict the number of unrelated people who can live in a single dwelling.

Nationally, advocacy organizations like the Institute for Justice are championing the ROOM (Restoring Options in Occupancy Models) Act, which would preempt restrictive local zoning rules to make SROs and co-living legal by right in both residential and commercial zones.

It's a strategy pulled straight from the same playbook that has pushed cities and states to reconsider the rules that make it difficult to build smaller, cheaper, entry-level homes. The logic is simple: If the market is allowed to produce only expensive housing, cheap housing will remain scarce.

Even some companies are rushing to re-create the starter rental through new models. One such example is Cohabs, a company offering furnished bedrooms in shared homes with communal kitchens, living spaces, and amenities in nine cities around the world.

In Brooklyn, that model helped a 33-year-old tech worker find housing after moving to the city from London. For $2,100 a month in Crown Heights, he gets a furnished bedroom, Wi-Fi, utilities, weekly cleaning, a monthly communal breakfast, and access to shared spaces including a terrace, rooftop, small gym, and basement TV room—as well as 23 roommates.

In some ways, it looks like a new, more polished version of the old SRO. But it also shows how much the floor has risen. A century ago, these micro-units offered a private room for the modern equivalent of a few hundred dollars a month. Today, that model comes with a 10X premium.