US homes are finally getting smaller

Any trend toward smaller homes would be welcome news in many U.S. housing markets

By Bloomberg News

Jun 1, 2017 @ 7:33 pm EST

It's not quite a tiny-house movement, but homebuyers frustrated by the lack of listings that fit their budget will probably take it.

In the aftermath of the U.S. foreclosure crisis, homebuilders focused on the top end of the market, where it was easier to find attractive profit margins and credit-worthy borrowers. The median size of a new single-family home increased year after year, reaching a high of 2,467 square feet in 2015 — 49% bigger than in 1978 and 8% larger than the prerecession peak in 2007.

Now that trend has begun to reverse. The median home size decreased slightly, to 2,422 square feet, in 2016, according to the U.S. Census Bureau's annual report on the characteristics of new housing. The trend continued into the first three months of 2017, quarterly data show.

The shift may be a natural extension of how new home construction tracks with economic cycles. At the onset of a recovery, builders target high-end home buyers, who are less likely to be constrained by poor credit, according to a theory advanced by Robert Dietz, chief economist at the National Association of Home Builders. As the recovery reaches down the income ladder — or perhaps, as luxury markets become saturated — builders get started on smaller homes.

In 2016, that meant more new homes between 1,400 and 2,400 square feet. The share of homes larger than 3,000 square feet ticked down, as did the share of those of less than 1,400 square feet. Home sizes are still well above their prerecession peak, and the three-car garage is still more common than the one-bedroom apartment.

Still, any trend toward smaller homes would be welcome news in many U.S. housing markets. There were 40% fewer starter homes on the market in the first three months of 2017 than in the first quarter of 2012, according to Trulia.

"It absolutely could be that developers are starting to see that the housing shortages are at the middle and lower end of the market and are taking advantage of low inventory to provide smaller supply," said Ralph McLaughlin, chief economist at Trulia. "It's going to take a lot of new construction to see appreciable changes in the starter market."

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