How Home Builders Building Smaller Could Help Home Buyers

Blog posted On December 13, 2018

The phrase “inventory crunch” has become common in today’s housing market, with more and more buyers competing over a limited number of homes for sale.  Some of the causes of the inventory crunch are homeowners choosing to stay in their homes longer and home builders building larger.  Baby Boomers opting to age in place are choosing to renovate or adapt their current homes rather than downsize or migrate, while home builders facing affordability issues with the rising cost of construction materials are choosing to build larger homes to increase their profit margin.  However, with more first-time home buyers in the market for smaller homes, builders may need to build smaller to keep up with buyer demand.

The trend of building larger homes developed following the Financial Crisis.  With many consumers suffering the economic repercussions of damaged credit, lost jobs, and even lost homes, the main market for home builders were wealthy buyers who could still afford homes.  That coupled with the rising costs of construction materials, lumber shortages, and lost laborers contributed to home builders’ preference to build larger, luxury homes that would in turn yield larger profits.  This tendency to build larger homes has kept more first-time home buyers out of the market, leaving them to compete over fewer homes for sale.  

Since peaking in 2015, the National Association of Home Builders (NAHB) reports the average and median home sizes have steadily declined year-over-year as home builders attempt to fill the need for entry-level homes.  In the third quarter of 2018, Curbed.com reports “the one-year moving average of new single-family home sizes fell to 2,564.5 square feet, while the one-year moving median fell to 2,369.75 square feet.”  NAHB chief economist Robert Dietz specifically noted the rise in townhouse construction, in relation to the drop in high-end single-family homes, suggesting builders’ shift toward catering to entry-level first-time home buyers.  

Even as entry-level home construction starts to pick up, it will take some time before inventory is fully replenished, and for now, home buyers are still facing a competitive market.  First-time home buyers should be prepared to visit multiple properties and even make multiple offers before getting their offer accepted.  Determining what your new home must have and choosing where you are willing to compromise will help you set realistic expectations for your home search.  Working with a Realtor or real estate agent will also help you gain early access to listings, sometimes before they are listed publicly online.  

If you are a first-time home buyer or know someone who is starting their home search, check out our First-Time Home Buyers Guide for a detailed review of what you will need, what to expect, and how to have an extraordinary experience.  View here.

Sources: Curbed