The shrinking American home: As demand rises, builders go smaller

In an April report, JBREC surveyed 290 residential architects, designers and design-oriented builders and learned exactly how much homes are shrinking: A third of detached homes now being planned and built are expected to be under 2,000 square feet, and 70% will be under 2,500 square feet, the company found.  Townhomes are expected to be between 1,500 and 2,000 square feet. “While overall home sizes will shrink, townhomes may grow as would-be detached homes become attached to increase density,” the report said. 

And although “a lot of the market has historically been really resistant to density,” Arroyo said, even markets where lots and homes are typically bigger are seeing it increase. “Areas like Texas, where density wasn’t very common, we’re now seeing it increasing just because that’s the only way to get prices to an affordable level.”

As newly built homes get smaller, builders are allocating more space for more heavily trafficked areas of the house.

Builders are saying goodbye, for instance, to the formal dining room and welcoming a bigger kitchen island with seating. They’re adding another small bedroom instead of a bigger walk-in closet for the primary bedroom and including more outdoor space by forgoing a loft or a bonus room upstairs.

“We’re seeing a lot of deletion of separate, defined spaces,” Arroyo said.

“Think about the dining room and the living room. In the past, you would have had the downstairs of the house, which includes the kitchen, dining and living rooms. Now it’s just one great room and one kitchen,” she said. “And the kitchen is actually getting larger than it used to be, because we’re taking away the dining room.” 

Builders are shrinking homes in part to reduce costs, according to the JBREC report. Designers said that they were redesigning projects to reduce the cost of building by 7% to 10%. 

Amid a major shortage of home listings, the effort to build more homes is significant. With a limited number of existing homes for sale as homeowners find little incentive to sell and give up their ultralow mortgage rates, buyers are increasingly turning to new construction, and builders are expected to fix the supply shortage.

But just because they’re smaller, new homes are not necessarily getting cheaper. The median price of a newly built single-family home was $415,400 in June. The price of an existing home in June was $410,200. 

And home buyers still have to contend with the 30-year mortgage rate, which was at 7% at the start of August. Plus, builders aren’t exactly slashing prices to give buyers a leg up at their expense.

Nonetheless, these newer, smaller homes do present an opportunity to both the industry and to aspiring homeowners. “As data suggests, some first-time buyers are opting to go with less square footage or fewer options and upgrades as buyers need to purchase a home in today’s dynamic market environment,” Ryan Marshall, CEO of PulteGroup
PHM,
+0.13%,
a major home builder, said on the company’s second-quarter earnings call.

“What we generally see is that buyers continue to want as much square footage as they can get, but they’re constrained by what they can afford, which is why we continue to start more and more of our smaller floor plans,” Jessica Hansen, vice president of investor relations at D.R. Horton
DHI,
+0.06%,
another major home builder, said on that company’s third-quarter earnings call. 

“We did see a slight tick down on a year-over-year basis … by about 2% in the terms of square footage on our homes closed,” she added.

MarketWatch has reached out to both companies for comment.

Inside the home, buyers should expect less granite and more synthetic materials like quartz, Arroyo said. Homes are also being built with a bigger focus on cost-efficient materials, she said, but added: “I don’t predict a huge decline in specification level.”

Although new homes have historically been much more expensive than resale homes, that gap has narrowed in recent months. 

“It’s not solving the affordability crisis, but it is creating opportunities for people to be able to afford an entry-level home in an area,” Arroyo said. “Size is probably the No. 1 way you get the density. And if you get that size down, that automatically will make it a more affordable home.” 

And those who are longing for a big house shouldn’t fret — not all homes are going to get smaller, Arroyo said. Luxury builders will continue to build big homes where there’s demand for them. 

“The [builders] that are decreasing [size] the most are probably the ones that try to build more of an affordable product,” Arroyo said.