Newly built homes are shrinking in size as America's homebuilders try to lure buyers seeking more affordable options in a high-interest-rate environment.
The biggest US homebuilder, D.R. Horton (DHI), recently said the average square footage for homes closed in its most recent quarter was 1,980 square feet, down 2% from the same quarter last year.
“To address affordability for homebuyers, we are still using incentives such as mortgage rate buydowns, and we have reduced the prices and sizes of our homes where necessary,” D.R. Horton CFO Bill Wheat said on a call with analysts in April.
Meanwhile, LGI Homes (LGIH) reported in April that 33% of homes closed during its first quarter were under 1,500 square feet, up from 23% during the same period a year ago.
Building smaller has become a means for builders to capture first-time buyers who are struggling to purchase homes amid elevated borrowing costs and low housing inventory, as homeowners with cheaply financed properties remain reluctant to sell. Smaller home sizes allow builders to keep prices lower.
“It’s entirely affordability driven,” Mikaela Arroyo, vice president of the New Home Trends Institute at John Burns Research and Consulting, told Yahoo Finance in an interview. “Prices are just so out of reach for consumers that we are trying to figure out ways to make it realistic for consumers to purchase the house, and decreasing square footage is one of the ways to get there.”
Home prices rose 6.4% annually in February, their fastest pace since November 2022, according to Case-Shiller data released late last month.
On top of the sale price, buyers are also grappling with a high cost to borrow. Mortgage rates have been hovering above 7% for the past three weeks.
Read more: Mortgage rates top 7% — is this a good time to buy a house?
The average square footage of a new home stood at 2,374 square feet in the fourth quarter of 2023, lower than the 2,468 square feet reported in the year-earlier period, according to data from the Census Quarterly Starts and Completions report and NAHB analysis. That’s a difference of 94 square feet, or the size of a small secondary bedroom.
Achieving a smaller home size means builders must think creatively about layouts. Designers are replacing multiple formal living and dining spaces with eat-in kitchens and flex spaces, per John Burns. This allows kitchens to still be larger and more open — a feature commonly sought out by buyers — despite builders shrinking overall square footage.
Another trend that seems to be sticking: less dead space in the primary bedroom.
“Instead of a giant primary bedroom with a bunch of open space, you're tucking a little optional built-in workspace that they can use as a secondary workspace option,” Arroyo said. “Bathrooms [are staying] pretty similar in size, though. We're seeing people get rid of the tub a little bit more.”
There are other areas where builders look to save on space: “Some areas of the home we are finding consumers using less often include foyers, front porches, and oversized bedrooms,” Brian Juedes, vice president of product design at homebuilder Taylor Morrison, told Yahoo Finance.
First-time buyer Hannah Oehlberg is one example of a consumer who found a smaller-sized home appealing.
Oehlberg had been renting for four years and wanted a place of her own. In 2022, she purchased a 1,553-square-foot townhome with three bedrooms and 2.5 baths from Taylor Morrison in Sarasota, Fla., and moved in last summer.
At this square footage, Oehlberg was still able to have extra space for an office she desired and room to grow a family. "It feels bigger than it [is]," Oehlberg said.
"I was looking at owning something and not wasting money on renting," Oehlberg added. "I wanted to build up some equity for the future."
Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter @daniromerotv.
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