June 2, 2017

Builders Finally Return to Smaller Homes and Consumers Respond

In 2007, the average newly-constructed single-family home was 2,520 square feet, increasing annually for the 11th time out of the prior 12 years as consumers desired more space, financing costs were low and risk appetite was high. In that year, 28% of homes built were less than 1,800 square feet in size, the lowest level since the data began.

However, in the midst of the financial crisis, builders and consumers were justifiably focused on affordability and "stretching" was no longer permitted under more stringent mortgage underwriting criteria. As a result, discretionary purchases declined, density increased and the average home size shrunk, with the share of homes smaller than 1,800 square feet rising to 33% in 2009, the highest level since 2002.

As legacy land ran dry and builders shifted newly-underwritten projects to the safe end of the spectrum, including high-quality locations and move-up price points, the true entry-level product was sacrificed, driving the share of homes less than 1,800 square feet down for five consecutive years to just 21% in 2015.

Based on data just released by the Census Bureau, that trend was finally halted in 2016 with the smaller home share rising marginally to 22%. While a minor shift on the surface, homes built with less than 1,800 square feet increased 20% year over year, the largest percentage increase of at least the last 25 years and solidly ahead of other sized homes at 12%.

This increase aligns with our prior tracking of production single-family homes for sale across 25 of the largest builders in the country, which we conduct on a quarterly basis. For that sample of builders in Atlanta, Austin, Charlotte, Dallas, Houston, Jacksonville, Orlando, Phoenix, San Antonio and Tampa, the share of available inventory sized under 1,800 square feet increased a similar 80 basis points on average in 2016 from 2015. Importantly, in 1Q17, the share was 100 basis points higher than in 1Q16, a clear sign to us that outsized growth of entry-level new construction in 2016 was the start of a trend that we believe could last numerous years.
 

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