US New Homes: The Shocking Truth about Rising Buying Costs and Shrinkage

In the face of rising housing costs, builders have found a way to adapt: constructing smaller homes. The median square footage for a home under construction has reached its lowest point since 2010, with the current average size being 2,191 square feet, according to data from the U.S. Census Bureau. This represents a decrease of nearly 3% compared to the first quarter of this year and a significant drop of over 6% since the end of 2021, which marked the peak in home size over the past five years.

Experts suggest that the shift towards smaller homes is an attempt to address the challenges posed by housing affordability. Robert Dietz, the chief economist at the National Association of Home Builders, explains that the size of homes being built initially increased at the start of the pandemic due to low mortgage rates and the need for dedicated workspaces within homes. However, with mortgage rates on the rise, Dietz predicts that the median and average square footage will continue to decline.

As of August 21, the survey for 30-year fixed mortgage rates from Mortgage News Daily reached an alarming 7.48%, the highest level in more than 20 years. Coupled with the fact that home prices remain high in most markets, affordability has plummeted to near all-time lows. The Wells Fargo/NAHB Housing Opportunity Index, which measures affordability, stood at 40.5% at the end of June, slightly better than the all-time low of 38.1% recorded at the close of 2022.

Despite these daunting affordability figures, there is still a demand for new homes, potentially due to their smaller and more affordable nature. Affordability seems to be a driving factor when it comes to the size of homes being built. Prior to the past year, the trend over the past 25 years was to construct larger single-family homes. However, following the Great Recession, the market share of entry-level new construction declined while home size increased from 2009 to 2015. The subsequent years saw a reversal of this trend as the focus shifted towards developing more starter homes, resulting in a decline in average home size between 2016 and 2020.

It is worth noting that home size varies by region. In the Northeast, the median square footage for a home under construction in the second quarter was 2,410, while in the Midwest it was only 1,979 square feet. The South region had homes under construction with a median size of 2,248 square feet, whereas the West came in at 2,135 square feet.

In conclusion, the homebuilding industry is adapting to the challenges posed by soaring housing costs by constructing smaller and more affordable homes. The decline in median square footage for homes under construction reflects the urgent need to address housing affordability concerns. While mortgage rates continue to rise, it is expected that the size of newly constructed homes will continue to shrink. Despite these challenges, the demand for new homes remains strong, with affordability playing a significant role in consumer preferences.