Split image of 3 smaller homes on left being developed and on right is a large home greyed out
Illustration by Lanette Behiry/Real Estate News

Homes are getting smaller — which could improve affordability 

Newly built homes continue to lose square footage. But agents see an upside for buyers seeking more affordable options.

March 3, 2023
3 minutes

Key points:

  • The square footage of a new home during the fourth quarter of 2022 dropped to its lowest level since 2011.
  • The transition to smaller homes comes at a time when home affordability is also hitting new lows.
  • Downsizers and first-time buyers can be good candidates for smaller homes, with their lower utility bills and less space to maintain.

In the realm of new construction, builders are finding that affordability is now trumping pandemic space.

According to U.S. Census data and analysis by the National Association of Homebuilders (NAHB), the median square footage of a single-family home dropped to 2,203 in the fourth quarter of 2022, another dip from Q3 and the lowest level since 2011. 

It's quite a turnaround from the early days of the pandemic, when people wanted more space because they were spending more time at home. 

But space and affordability are competing factors, and in a higher-interest-rate environment, affordability carries more weight, particularly for first-time buyers. "The tighter budget factor is likely to dominate in coming quarters," said Robert Dietz, chief economist at NAHB.

According to the NAHB/Wells Fargo Housing Opportunity Index, only 38.1% of new and existing homes sold in the fourth quarter were affordable to families earning the U.S. median income of $90,000. That's the third straight record low for the index, which began tracking the data on a consistent basis in 2012. It's also a big drop compared to the fourth quarter of 2021, when the index was at 54.2%.

Affordability appears to play a role in home size. Prior to recent months, the trend over the past 25 years has been to build larger single-family homes, with two noticeable dips. 

The first dip was prior to the Great Recession, when home prices were skyrocketing. It happened again between 2016 and 2020 as the economy recovered, and construction companies could once again develop starter homes after years of running into funding challenges.

Finding buyers for smaller homes

Changes in land use policies have enabled the construction of more small homes — sometimes very small homes on a shared lot. In Kirkland, a city on the shores of Lake Washington near Seattle, Windermere broker Max Rombakh said he's seeing different housing options after the city adopted zoning changes to address the shortage of mid-level housing, sometimes referred to as "missing middle housing." 

The changes have resulted in more options for buyers and homeowners, including cottages and accessory dwelling units that are smaller but attractive to those looking for a good location, Rombakh said. 

"I would want to own the least expensive real estate in the most expensive neighborhood," Rombakh said, adding that such homes tend to appreciate faster because of the location. The smaller homes Rombakh has seen also tend to have more upgrades, which is a major selling point.

"Ultimately the majority of consumers that are buying smaller homes are downsizers or starter families," he said. 

While some new buyers are skeptical, purchasing a larger home that's farther away can have other drawbacks. Plus, smaller homes mean lower utility bills and property taxes, as well as less maintenance.

One downside for some buyers: Smaller homes tend to only have a one-car garage — or no garage at all. "That's usually the biggest hurdle we're getting people over," Rombakh said, adding that yards also tend to be smaller.

However, affordability is often a deciding factor, especially in a place like Kirkland, where the average home price can be in the $1 million range.

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