Worst of both worlds: Homes have become smaller and much more expensive
The typical American home is now 128 feet smaller and $125,000 more expensive than it was five years ago.
According to Realtor.com data, home sizes shrunk in 132 of the country’s 150 most populous metro areas compared to 2019. Conversely, this means only 18 metros saw home sizes expand over that period.
This wouldn’t be such a big problem if not for the 39% spike in average home values between 2019 and 2024.
“Metros with shrinking square footage continue to get more expensive per square foot,” the researchers wrote. “Essentially, building smaller houses isn’t stopping the growth in price per square foot, leaving buyers with a smaller house and an inflated mortgage.”
Homes shrunk the most in parts of Colorado, North Carolina, and other southern states. In terms of square footage costs, the Florida metro of Naples saw an 88% spike, higher than any other region.
The irony in all this is that homebuilders have been actively reducing home sizes to boost affordability.
According to John Burns Research and Consulting vice president Matt Saunders, builders are trying to “address these affordability concerns head-on, and one of the main kinds of levers that they’re pulling is reducing home square footage.”
While major price cuts aren’t as common these days, experts say that could soon change as homebuilders try to lure buyers back into the market.
Inventories are piling up
Since Covid, America has been grappling with a crippling housing shortage but recent data points to a reversal in the supply of new homes.
According to the National Association of Home Builders (NAHB), America currently has a nine-month supply of new builds for sale, which is nearly three times higher than that of existing homes.
Under normal circumstances, a growing supply of unsold homes would cause property prices to decline. However, new builds only account for roughly 12% of the housing market despite making up 30% of inventory.
As the National Association of Realtors explains, Americans don’t want new builds. They’d rather have affordable homes in the $100,000 to $500,000 price tier. Unfortunately, homes in this price range have the lowest supply.
Like the rest of the housing market, demand for new builds is heavily influenced by mortgage rates. The recent drop in financing costs spurred a 10.6% spike in new home sales in July, snapping four consecutive months of declines.
July also marked the highest annual sales pace for new builds in over a year. This means Americans are willing to tolerate smaller home sizes, so long as mortgage costs become affordable.
According to Freddie Mac data, average 30-year mortgage rates have declined in 14 of the last 17 weeks and currently sit at 6.35%, the lowest since April 2023.
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