Model houses declining in size

Newly constructed homes are getting smaller 

With rising interest rates cutting into the amount of square footage buyers can afford, new home sizes have been trending down.

November 21, 2022
3 minutes

Key points:

  • The median square footage of homes under construction was 2,276 in the third quarter, a decrease of 2.5% from the end of 2021.
  • Home footprints have been declining throughout 2022.
  • Affordability appears to be the dominant factor as buyers struggle to find a mortgage payment that fits their budget.

Builders seem to be getting the message about affordability in the current market. With the cost per square foot at a premium, new homes are getting smaller.

The median square footage of new home starts in the third quarter was 2,276, according to data from the U.S. Census. That continues a steady decline that began in the fourth quarter of 2021, when the median square footage was 2.5% higher at 2,335.

The size of new homes grew throughout 2021 when interest rates were low, and buyers, who were spending more time at home due to the pandemic, sought more space.

"For buyers who need a home right now — and can still afford it — compromise is the name of the game," said Redfin Senior Economist Sheharyar Bokhari in an October report about existing home sizes. "Some buyers will choose to sacrifice on location or move further away from the city center so they can get the space they want, while others will settle on a smaller home in their ideal location."

As interest rates and home prices remain elevated, the trend toward smaller homes will likely continue in the coming months, said Robert Dietz, chief economist for the National Association of Home Builders. Dietz expects "home size to face opposing determinants" — buyers' desire for more space and the reality of tighter budgets — but "the tighter budget factor is likely to dominate in coming quarters."

The Redfin report illustrates just how big of a bite higher interest rates and home prices have taken out of buyers' budgets. With a $3,000 monthly mortgage budget, a buyer could afford a 936 square foot home in San Diego in September, down from 1,366 square feet a year earlier. Across the U.S., buyers in many metros have lost at least 100 square feet of buying power.

The jump in mortgage rates impacts home sizes differently because prices and annual price growth vary depending on location, according to the Redfin report. The mix of homes available to buy also changes from one year to the next. 

The size of homes newly under construction varied by region during the third quarter, according to census data. Housing starts in the Northeast were the largest, with a median square footage of 2,571. The Midwest had the smallest, with a median square footage of 2,110.

Among completed homes hitting the market, the trend of decreasing square footage started later, according to the data. The median square footage in the third quarter was 2,308, down from the second quarter's estimate of 2,325 square feet. The second quarter was the highest total in the pandemic period.

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