Let’s go back a few years, to the height of the pandemic. People were mostly working from home, mortgage rates were at historic lows, and that fueled housing demand, which pushed home prices up. But now, mortgage rates are hitting two decade highs and home prices are still high, too. This all to say that housing affordability has deteriorated, and it’s actually worse now than at the height of the housing bubble. And, it shows in more ways than one—but in this case, homes are shrinking.
“Nationally, what we’re finding is home sizes are down 10%,” Zonda’s chief economist, Ali Wolf, told Fortune. Between August 2018 and August 2023, newly constructed homes across the country, on average, have gone from 2,681 square-feet to 2,420 square-feet, according to Livabl by Zonda. That’s a 10% reduction over the course of five years.
“Builders have become increasingly aware of how bad affordability challenges are today, and that they need to do something to continue to be successful,” Wolf explained, “And in this case, they’re trying to lower the overall home size to help lower the overall home price.”
In a Livabl by Zonda survey, builders were asked if they were changing their product to lower costs and sales prices, and the number one answer was: yes, smaller home sizes, Wolf said, (to be exact, 46% of builders answered with that). Her team likes to think about it as “right-sizing” homes, with builders reviewing old floor plans, looking for dead space, and deciding what to cut. They’re thinking about how they can build homes more efficiently, which can mean being smarter with where the hallways are or how big the rooms need to be, Wolf said.
Matt Saunders, senior vice president of building products research at John Burns Research and Consulting, previously told Fortune, that the reduction in home size isn’t a “uniform reduction in square footage,” rather it was a sort of tradeoff within the home. Builders and architects were choosing to increase kitchens and outdoor spaces to accommodate buyers by reducing, let’s say, formal dining spaces.
For a very short period of time, builders seemed to have intentionally changed their product, and went slightly larger with homes to account for the pandemic-fueled demand that largely correlated with a need for more space. But as life normalized again, as Wolf put it, with people going back into the office, builders are back to building smaller homes.
“We were already starting to have a decline in overall home size going into the pandemic—and so this is really picking up where we left off,” Wolf said. “And that’s because even before the pandemic, we were concerned about affordability and that’s still builders’ focus today.”
On the other hand, there’s the actual land to consider. In several housing markets across the country (particularly, in so-called desirable areas) land is limited. If you want to build more homes, higher-density homes are clearly going to allow for the most use of any piece of land, Wolf explained. Because land is a finite resource, it’s almost like a fixed cost, which could represent 20% to 50% of the home price in some markets, Wolf said. But what builders can do, she said, is change the home size.
“This is their attempt of saying, there’s a lot of things we can’t control, but one thing we can control is home size and density—and if we know that there are a bunch of buyers sitting on the sidelines, and they’re just not buying today because they can’t afford it, this is something that we can at least try to solve for,” Wolf said.
Seattle, San Antonio, Minneapolis, Charlotte, and Raleigh are leading the way with shrinking homes; although there’s two sort-of buckets these markets fall into, Wolf said. Seattle, which saw its average home size drop 18% in five years, is one of the markets that was already close to being, if not already, unaffordable. Typically, with high interest rates, those high cost markets take a greater hit, Wolf explained, and given that Seattle’s average home value is down close to 7% in the past year, it seems like a perfect example. “Seattle is just a direct response to, we’ve been an expensive market, it’s become increasingly more expensive—the only thing we really can do at this point is to try to change the kind of homes,” Wolf said.
As for the others, all four were historically affordable markets, and are still relatively affordable. But they’ve become really expensive, relative to themselves, Wolf said, as more and more people moved to these cities following the onset of the pandemic. Builders in San Antonio and Charlotte, so to speak, didn’t have to worry about the kinds of homes they were building because most of them would’ve been considered affordable. But that’s changed, and builders in these sorts of middle markets are facing this new affordability challenge, Wolf said.
It’s something they haven’t dealt with in the past, so they’re increasing their offerings to meet demand, and that can mean smaller, cheaper homes—a trend she suspects will continue over the next 10 years in these “traditionally affordable” markets. San Antonio, Minneapolis, Charlotte, and their surrounding metropolitan areas, each saw their average home size, and this is newly constructed homes we’re talking about, drop 14% from 2018 to now.
Let’s be clear, these aren’t tiny homes by any means; across each market mentioned, the average home size is still above 2,000 square-feet, so this isn’t necessarily bringing back the $300,000 starter home, that’s going extinct, as Fortune previously reported. At the time, a home under $300,000 was considered entry level, in Zonda’s view. Wolf previously told Fortune that homes under $300,000 were essentially “attainable housing,” and almost everyone “should be able to afford a home under $300,000, that is within the realm of what’s reasonable.” But things have changed.
“Now we’re saying, entry level is under $400,000,” Wolf said. “So we’ve almost done a threshold shift of: what does entry level look like? And because prices have gone up so much, we think it’s probably anything under $400,000 now instead of under $300,000.”
Some people might be disappointed with the trend of smaller homes, Wolf said, but at least builders are doing what they can to make homeownership available to more buyers. They could choose, she said, not to build smaller homes, and there’d be enough wealthy buyers to keep the housing market going. So, I asked her if homebuilders reducing home size is a testament to how unaffordable our housing market has become—she answered, “oh, of course…yeah, no doubt.”
“We are now in a very different housing market than we were going into the pandemic, and I think there are a lot of markets across the country that have become so expensive relative to themselves, that the only thing they can do is try to change, because otherwise housing would just be unaffordable for most people,” Wolf said.
