The Housing Scene by Lew Sichelman

The Slowly Shrinking House

Over the last decade, homebuilders have all but conceded the first-time buyer market to the resale sector. But evidence is mounting that builders are trying to get back into the game.

For one thing, they’re still building monster houses. Last year, three out of every 10 new houses were at least 3,000 square feet, and of those, 10 percent were at least 4,000 square feet, according to the U.S. Census Bureau.

Indeed, the average size of new houses “remains elevated,” said Rose Quint, an economist at the National Association of Home Builders. The average size of all completed single-family dwellings in 2018 was 2,588 square feet, the Census Bureau reported.

But that figure is on a downward trajectory. In 2017, the average size was 2,631 square feet.

The increase in size over the last decade, and now the small decline, are both consistent with historical norms, points out NAHB Chief Economist Robert Dietz.

“Typical new-home sizes fall prior to and during a recession, as homebuyers tighten budgets, and then rise as high-end buyers ... return to the market in relatively greater proportions,” Dietz says.

The pattern was exacerbated during the current business cycle because of the weaker market at the lower end of the price spectrum, as well as such supply-side constraints as labor shortages, more expensive building materials and a dearth of inexpensive building sites.

Builders still face some of those constraints, but the costs of many building materials -- lumber, drywall and concrete -- are heading down. And NAHB economists believe that their members will be adding more entry-level houses to their product lines.

In some cases, builders will be pruning square footage to hold down costs. But the mix is changing.

For one thing, townhouses are growing in popularity: Some 69,000 townhomes were sold last year, the most since 85,000 changed hands in 2007.

These attached single-family houses, which come in rows, are usually smaller than their stand-alone counterparts, Quint points out. They average about 2,000 square feet, and as such, says Dietz, they are the perfect jumping-off point for young buyers who want to transition from renters to homeowners. They’re particularly appealing for entry-level buyers who want more space but can’t afford those larger, detached houses, and they’re popular with builders in metro areas and older suburbs where land is scarce and expensive.

No wonder, then, that the townhouse sector is growing faster than any other. Builders started work on some 120,000 townhouses last year: a 15% jump in production over 2017.

But some builders are going smaller yet. Just outside of Denver, for example, KB Home just opened sales at Homestead Hills Villas, a community of 100 “paired” units once called duplexes. The units will share a common wall, and will range in size from roughly 1,400 to 1,900 square feet.

In Boulder, Colorado, the DTJ Design architectural firm has come up with a plan for clusters of what look like detached single-family homes that are actually connected to their neighbors by their garages. The 1,220-square-foot units can be arranged in all kinds of configurations.

Elsewhere, “micro-product” is capturing some attention, says John Hunt of MarketNsight, an Atlanta advisory firm. Hunt says that 650 people are on the mailing list for the 40 small houses in an East Point, Georgia, development. The houses will range in size from 500 to 1,000 square feet, with prices starting in the high $100,000s. And in Birmingham, Alabama, the Franklin condo conversion will have 14 units, including 500-square-foot studios staring at $159,000.

“We are beginning to see new cutting-edge for-sale product breaking onto the scene” in the 19 Southeast cities his firm serves, Hunt reports -- “product at square footages we have never seen, presented in new ways.”

As long as smaller houses are located in their preferred locations -- close to restaurants, employment centers and public transportation -- millennials are willing to pay more, says Hunt: “For many of today’s potential new-home buyers, experience and location trump square footage.”

And the prices may not be any higher than the rents they are paying now. At another Atlanta property, for instance, a mortgage on a proposed project of stacked condos would run $750 for principal and interest. Even when you add in property taxes and insurance, that’s likely much less than the $1,600 rents being paid nearby for a 560-square-foot apartment.

“Millennials are willing to live in, and potentially buy, small spaces in their target areas,” Hunt believes. And not just them: Baby boomers moving down the housing ladder will be vying for the same units, he says. “Their kids are gone, retirement is around the corner and they want to live where the action is.”

Meanwhile, lot sizes are also shrinking. About a third of all building lots last year were under a median 7,800 square feet -- the most in the last decade, the Census Bureau reported. And just 20 percent of all building sites were 22,000 feet or more -- the least since ‘09.

The average lot size for the year was 4,172 square feet, prompting Quint to note that “there are a lot of outliers out there.”