Competition is heating up among millennials and baby boomers for smaller, more affordable homes. But builders have been slow to meet demand. That may be showing signs of changing.
Home sizes are beginning to shrink, which may also help prices edge down, too.
“We are starting to see [smaller] starter homes come back,” says Rick Palacios Jr., director of research at John Burns Real Estate Consulting.
The uptick started slightly in mid-2016 as employment and wages rose.
More buyers are “now in that life stage of their early 30s [where] they’ve got a good job now, they’re getting married, they’re having kids,” Palacios says.
Some builders are heading farther from cities, where land is cheaper. Or they may construct more homes on smaller lots or build a line of attached townhouses.
“A builder can’t pay through the nose for land and then build a starter home on that land,” Palacios says. “It just doesn’t pencil out for them. [We’ve] started to see more builders gaining confidence in building lower-priced, smaller homes.”
Nearly 29 percent of the homes built between 2010 and 2015 were 3,000 square feet or more—hardly small by any standards. More builders focused on the high end of the market following the recession and built fewer smaller homes. Census data shows that 14.72 percent of new homes in the 1990s were between 1,000 and 1,499 square feet. Between 2010 to 2015, that percentage shrunk to 9.75 percent.
Robert Dietz, chief economist at the National Association of Home Builders, projects about 850,000 new homes will be constructed this year, even though the market could really support about 1.2 million new homes.
An uptick in smaller homes is “not something that can be fixed overnight,” he notes. “It’s going to take a while.”