It's a Small World

Less is more when it comes to starter homes today

By Jeff Schnaufer
CTW Features

Image courtesy istockphoto

With the recession downsizing the dreams of many Americans, it seems that the housing market was sure to follow: New homes are being built smaller and more affordable.

"A national survey of builders in late June showed that 59 percent of builders are saying they plan to build smaller homes or lower priced homes," says Stephen Melman, director of economic services at the National Association of Home Builders in Washington D.C.

The reason, experts say, stem from several factors.

"I think after some of the volatility in the energy prices of last year, people are recognizing that larger homes have higher costs in term of energy consumption," says Lawrence Yun, chief economist at the National Association of Realtors in Washington, D.C. "The other factor is that there has been a sizeable decline in the stock market last year. I think that has held back some of the wealthier potential homebuyers. But the biggest reason in my view why the upper end is sluggish is because it is much more difficult to get those large loan amounts."

The smaller size homes are more attractive because there is more access to mortgage finance, Yun says.

"First-time home buyers are looking for starter homes more within their budget," Yun says. "And first time home buyers are getting the tax break. Higher-priced homes are out of the reach of most first time buyers." As a result, Yun says, "there has been much more buying activity in smaller-size, lower-priced homes while the larger-priced, larger home sales have been more sluggish."

So what are homebuyers willing to sacrifice in a smaller home? That depends on the homebuyer.

"Do you drop the fourth bedroom or do you drop the fifth bedroom? Those are the decisions people are making," Melman says. "Maybe five years ago, you say, what the heck, and get that extra room."

"Probably the thing the consumers are most willing to sacrifice is a larger garage," says Kim Pontius, executive vice president of the Traverse Area Association of REALTORS(r), headquartered in Traverse City, Michigan. "In the new market, consumers would rather reduce their transportation-cost burden by requiring only one car, and in some cases no car, for increased buying power when it comes to choosing a home location."

Kitchens are very important, as are larger bathrooms, media rooms and master bedrooms with bathroom, Pontius says. Formal living rooms and dining rooms are not high on the list of features for homes.

Recessions have sparked construction of smaller homes before, Melman says. In 1973, the average home was 1,660 square feet. This had grown to 1,740 square feet prior to the recession of the 1980s, when new home sizes shrank to 1,720 square feet on average. When boom times returned, new homes mushroomed again, rising to an average of 2,080 square feet before the 1991 recession, which dropped new home sizes to 2,075 square feet. After that recession passed, home sizes continued to grow. By 2008, Melman says, a new single family home averaged out at 2,534 square feet.

When this recession ends, will we see a return to building and buying larger homes as fast as in decades past?

"I think consumers will be more cautious as they come out of the recession. And save a little bit of their money. And save more of their paycheck," Yun says.

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