Less money, less house: Forces reshaping the American home
Low inventory, high construction costs shift trend
The new American home is shrinking.
After years of prioritizing large homes, the nation's biggest and most powerful home builders are finally building more smaller ones, driving a shift toward more affordable housing.
The boom in smaller construction has cut median newhome sizes by 4 percent in the past year to 2,179 square feet, census data show, the lowest reading since 2010. That’s helped bring down overall costs and contributed to a 6 percent dip in new-home prices in the same period.
Townhouses, in particular, are increasingly popular, accounting for 1 in 5 new homes under construction at the end of 2023, a record high, according to an analysis of census data by the National Association of Home Builders. To cut costs, companies are building smaller and taller, with fewer windows, cabinets, and doors.
Altogether, this wave of new construction promises a crucial first step toward addressing a critical shortage of starter homes that has sidelined firsttime home buyers and contributed to inflation.
“Even a slightly smaller home can be thousands of dollars cheaper — for both builders and buyers,” said Andy Winkler, director of housing and infrastructure at the Bipartisan Policy Center, a Washington think tank. “This is a trend driven by just how unaffordable housing has become, with sky-high prices, rising interest rates, and so few homes for sale.”
Nikki Cheshire kicked off her home search in Frederick County, Va., with a wish list: three bedrooms, an attached garage, and a yard for her dog. But she quickly realized she’d have to think smaller.
The stand-alone houses she toured were well beyond her $450,000 budget. Cheshire looked for six weeks, was outbid twice, and eventually landed a newly constructed townhouse for $408,000. It checks all the boxes, albeit at a smaller scale. But more importantly, she said, it’s affordable.
“I looked at so many houses, but so many of them were too big and too expensive,” said Cheshire, 29, who works in corporate communications. “The one I got — yes, it’s smaller and doesn’t have everything — but it’s enough.”
This new trend is an aboutface from early in the pandemic, when Americans sought out larger living spaces. Many moved into sprawling homes on the outskirts of town, sending luxury-home prices soaring. Extra pandemic savings, combined with rock-bottom interest rates, made it possible for many families to buy homes for the first time or upgrade to larger, more expensive properties.
As a result, median home prices have jumped a whopping 28 percent in the past four years, to nearly $418,000. At the same time, mortgage rates have more than doubled to almost 7 percent, down slightly from a 23year high reached in November. Taken together, homes in the United States are less affordable than they’ve ever been, according to Goldman Sachs.
A shortage of homes, especially smaller, more affordable entry-level ones, has added to the problem. For years, builders have focused on more profitable properties, with construction concentrated in two extremes: houses on large suburban lots, or steel-and-concrete apartment buildings in urban areas, according to Robert Dietz, chief economist for the National Association of Home Builders.
That has slowly begun to change, as home builders face higher borrowing costs and growing demand for more affordable options. In earnings calls, some of the country’s largest publicly traded home builders have said they are rethinking their plans so they can prioritize smaller, more affordable housing. D.R. Horton, the country’s largest home builder, sold more than 82,000 homes last year, most of them under $400,000, to first-time buyers. Its lineup now starts at about 900 square feet.
“We are continuing to shift … to more and more of our smaller floor plans to address affordability issues in the market,” Jessica Hansen, senior vice president of communications, said in a November earnings call.
Even Toll Brothers, known for its high-end properties with an average sales price of $1 million, is downsizing to lower-priced options, which are also faster to build. Sales of “affordable luxury” homes, starting at about $400,000, more than doubled in the past year, outperforming more expensive properties.
“With 75 million millennials out there, we were not going to wait for them to hit their 40s and buy their move-up home,” chief executive Douglas Yearley said in a December earnings call, adding that he expects entry-level homes will eventually make up 45 percent of homes sold by the company. “I’m really proud of how … we went after the more affluent first-time buyer.”
The housing crisis has been an ongoing challenge for the Biden administration. In his State of the Union address, the president proposed sweeping measures to encourage more entry-level homeownership, including building and renovating 2 million affordable homes and offering $9,600 in tax credits that Americans could put toward a mortgage.
“I know the cost of housing is so important to you,” Biden said. “Inflation keeps coming down, and mortgage rates will come down as well. But I’m not waiting.”
Prices for entry-level homes, which hit a record $243,000 last year, according to Redfin, have risen rapidly since the Great Recession, when home-building activity slowed to a halt.
The country added fewer single-family homes in the 2010s than in any decade since the 1960s, according to Daryl Fairweather, Redfin’s chief economist, resulting in a shortage of millions of homes.
“It is clear that there simply aren’t enough homes to accommodate everyone,” said Orphe Divounguy, senior economist at Zillow, which estimates a national shortage of at least 4.3 million homes. “The decline in affordability meant buyers have pivoted to lower-priced homes, which includes what we could consider starter homes.”