Fundamentally, every major housing market in the country is overpriced right now, Matt Saunders, senior vice president of building products research at John Burns Research and Consulting, told Fortune, adding that this is generally true if youre looking at it from a housing cost to income ratio.
In order to address the affordability crunch, many builders are reducing home size.
Theres really this active response by the builders to address these affordability concerns head on, and one of the main kind of levers that theyre pulling is reducing home square footage, Saunders said.
In several markets across the nation, housing just doesnt feel attainable. Look no further than a couple earning around $225,000 annually but feels as though owning a home in Los Angeles is hilarious, and a business owner renting in New York City despite earning over $200,000 annually. According to Bank of Americas annual millennial housing survey, the lack of affordability is why attaining the American dream is becoming more challenging than ever. And not only are builders addressing affordability for buyers, but theyre also doing so for themselves. Relative to 2019 levels, costs for builders are still up around 35%, Saunders said. By reducing the size of the homes they build, theyre also reducing their material costs.
Interestingly enough, its not a uniform reduction in square footage, Saunders said. Instead, its sort of a trade off within the home, and that can be seen in John Burns Research and Consultings annual survey of architects for homes built last year, shared with Fortune. Kitchens and ground floor outdoor space, for instance, were considered a top priority leveling up in allocated share within homes. Meanwhile, upper level outdoor space, secondary bedrooms, and shared family areas were considered low priorities, declining in physical home share. That all means that buyers would rather have a larger kitchen space and larger backyards or front yards, than extra bedrooms and additional living spaces. In order to do that, builders and architects are choosing to reduce the size of the latter options to give way to the former.
What were seeing in the data is that, for example, kitchens are growing by cannibalizing formal dining spaces, Saunders said. And so theres this trade between larger kitchen sizes, cannibalizing the formal dining spaces of the home.
The same can be said for ground floor outdoor living spaces, amid a growing appetite for outdoor living, as Saunders put ita trend that predated the pandemic but accelerated with the pandemic. This survey, he said, is a leading indicator of what we can expect this year and over the next few years.
Its all to address these affordability constraints, Saunders told Fortune.
In particular, builders are shrinking secondary bedrooms and shared family areas. The pandemic changed a lot of things, but mostly how people work and live at homeand thats reflected in what buyers are prioritizing in their homes.
Close to half of the surveys respondents anticipate that projects will be even smaller in square footage this year compared to last year. With that, Saunders said theres an increase in production of entry-level homes. As Fortunes previously reported, the share of projects under $300,000 declining all across the country, according to Zonda, a housing data and consulting firm. Zondas chief economist, Ali Wolf, explained that the decline of the $300,000 starter home has a lot to do with the Pandmic Housing Boom, which sent home prices up 41% on a national level. Therefore its possible that builders reducing home sizes to increase affordability could essentially bring back starter homes, or homes under $300,000 that should be considered attainable housing, according to Wolf.
Affordability is a broader issue that needs to be reset and the builders are right now solving for affordability, Saunders said.
Reducing home size is a way for builders to make housing more affordable. Builders want to address affordability constraints so they can sell homes, its as simple as that. And its the same reason builders are offering rate buydowns, temporarily bringing a buyers rate from, say, 6.5% to 4.5%.
As of right now, incentives like rate buydowns are making the difference. However, Saunders said, there are early signs that builders reducing home sizes is working too.
Our forecast right now, in terms of average square footage, is for single-family starts to decline by around negative 3% this year, and then around negative 2% next year, Saunders said. So I think this is a multi-year trend were seeing right now and confirmed by this architectural surveya crystal ball of whats coming in the pipeline.
