The McMansion isn’t dead yet, but the homes are shrinking. Last year, the average size of new homes fell to its lowest point in more than a decade, census data show. The average single-family home size decreased by about 4% between 2022 and 2023; it hasn’t been this small since 2010.
Maybe it’s the starting house that’s dead. Nearly a year ago, Ali Wolf, chief economist at housing market data firm Zonda, told me that the $300,000 starter home was becoming extinct. The share of new home projects under $300,000 was declining across the country. We have to go back a few years to understand why.
The pandemic fueled a real estate boom; people were working from home and wanted more space and could move wherever they wanted. Historically low mortgage rates also helped. Home prices skyrocketed in light of demand, and not long after, mortgage rates hit a more than two-decade high due to surrounding economic conditions (which also drove up the cost of buildings and land values). This is all to say that housing affordability has gotten worse, so homebuilders are building smaller homes.
Builders can’t change the cost of land, or the cost of construction, or how much home prices have risen, but they can change the size of homes. But it won’t actually bring home the $300,000 holder. Wolf’s team even changed the definition of entry-level to below $400,000. This is where shrinkage comes in: Homes are shrinking, but prices aren’t really falling. To be clear, the average sales price of new homes has down slightly over the past two years — at its peak in October 2022, it was $496,800 and in January it was $420,700 — but there are likely many factors at play, and smaller homes may be just one of them. Not to mention, new home prices have been rising for about four years since 2018, when home sizes began shrinking over a five-year period, according to Zonda data.
In May last year, Fortune they reported that builders had no choice but to build smaller homes because of how unaffordable housing had become. “There’s really this active response from builders to directly address these affordability issues, and one of the main levers they’re using is reducing the square footage of homes,” Matt Saunders, senior vice president of product research for the construction at John Burns Research and Consulting, told Fortune, at the moment.
However, Saunders’ research, based on an annual survey of architects, found that it was not a uniform reduction, but rather a compromise within the house. Kitchens and ground floor outdoor space, or courtyards, were considered more important than secondary bedrooms or guest rooms. Saunders explained that this was a trend that preceded the pandemic, but accelerated with it, and would continue as time went on, as nearly half of those surveyed predicted that new homes would be even more small in terms of square footage the following year. His team projected that the average square footage of new single-family homes would decline about 3% last year and 2% this year.
More than three months later, Fortune Builders reported that they were once again solving accessibility constraints by building smaller homes. Zonda chief economist Ali Wolf said this Fortune that between August 2018 and August 2023, new homes across the country dropped from 2,681 square feet to 2,420 square feet, a 10% reduction in five years.
“Builders have become increasingly aware of how difficult affordability challenges are today and that they need to do something to continue to be successful,” he said. “And in this case, they are looking to reduce the overall size of the home to help lower the overall price of the home.”
A survey by Livabl by Zonda found that the number one answer builders gave as to whether they were changing their product to lower costs and selling price was yes, with smaller homes. Not unlike Saunders, Wolf said his team considered it “right-sizing,” as builders were looking for dead space to cut. And again, this was a pre-pandemic trend, although during the pandemic there was a period where builders were building slightly larger homes since that’s what people wanted.
“We were already starting to have a decline in overall home sizes before the pandemic, and so we’re really picking up where we left off,” Wolf said. “And that’s because even before the pandemic, we were concerned about affordability and that’s still the focus of builders today.”
Homes are shrinking, but prices are not necessarily falling significantly or fast enough (signaled by contracting inflation). And from December last year to January, the average sales price of new homes actually increased, from $413,000 to $420,700, perhaps a sign that the downward price trend over the past two years was temporary.