The Long Home Market Shift
Monday, August 14, 2017
By Robert Dietz, NAHB Chief Economist
Over the past several decades, a significant change in the distribution of new, single-family home size occurred as builders constructed larger, more expensive homes. This evolution is notable because the housing market segment with the tightest inventory is currently starter homes. And while recent trends show a small but measurable dip in median home size, reflecting an ongoing broadening of the new-home inventory base, the long-term trend of a shift to larger homes persist and will have important consequences on housing affordability.
Consider the following data from the Census Bureau American Housing Survey (AHS). With respect to single-family detached homes built during the 1990s (9.8 million homes out of the 15.6 million total single-family and multifamily residences during the decade), median home size was 2,000 sq. ft. And 41.4% of these homes were no more than 2,000 sq. ft. in size.
Now contrast that with recent construction, new single-family detached homes built from 2010 to 2015 (2.2 million of a total 3.8 million new single-family and multifamily units). A significantly smaller share, 32.3%, consisted of homes with no more than 2,000 sq. ft. And the percentage of homes with 3,000 sq. ft. or higher rose from 23.2% during the 1990s to 28.6% from 2010 to 2015.
These changes reflect rational responses to cold, fundamental market realities. Rising regulatory costs, increasing labor and land costs, and a tighter financing environment encouraged builders to shift to the higher end of the market in greater numbers. What’s interesting is that many of these developments are firmly rooted on the supply-side of the market, not changes in demand or consumer preferences. For example, the AHS data also show that median square footage per person residing in these homes barely changed, rising from 883 sq. ft. per person for homes built in the 1990s to 900 sq. ft. more recently.
What has changed, driven by an increasingly costly and inefficient regulatory environment, is the ability of builders to provide homes to all types of potential buyers, including lower-income families and smaller households. That’s a clear negative for housing affordability, as tight existing-home inventory conditions will drive pricing relatively higher among starter homes.
The good news is that builders are finding creative, if tentative, approaches for supplying homes at the lower end of the market. For example, townhouse construction made up 6% of total single-family homes built during the 1990s. But that share rose to 9% from 2010 to 2015, and recent data show the share in 12% range in recent quarters. These and other market responses will be necessary as prices, costs, and interest rates rise in the years ahead.