- Housing affordability is so strained that some homebuilders are turning to smaller builds
Housing affordability is so strained that some homebuilders are turning to smaller builds
Parcl Labs: The median square footage for new construction fell by 3% in 2023, marking the biggest single-year dip over the past decade.
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On last month’s earnings call, D.R. Horton CFO Bill Wheat told analysts that “to adjust to changing market conditions during fiscal 2023 and into fiscal 2024, we have increased our use of incentives and reduced home prices and sizes of our home offerings, where necessary, to provide better affordability to homebuyers.”
In 2023, D.R. Horton reduced its average square foot by 3%. Heading forward, the nation’s largest publicly traded homebuilder told investors that they expect “continued gradual moves down from a mix shift perspective in terms of average square footage.”
In economics, there’s a term for when a business reduces the size or quantity of a product while keeping the price roughly the same: Shrinkflation.
To find out just how much shrinkflation might be occurring in the new construction sector, ResiClub reached out to Parcl Labs, a fast-growing real estate analytics firm, to get the hard data.
Before delving into the hard data, it's important to emphasize that ResiClub isn’t implying anything negative by our use of “shrinkflation.” From an economic perspective, it makes sense that a rapid deterioration in housing affordability—with mortgage rates rising from 3% to over 6% in 2022—would lead builders to opt for strategies that could, at the margins, keep affordability in check and maintain sales.
According to Parcl Labs, the median square footage for new construction fell from 2,098 in 2022 to 2,036 in 2023. That 3% year-over-year decline marks the biggest single-year dip over the past decade.
So it isn’t just D.R. Horton. A lot of homebuilders are reducing size.
The trend has been accelerated by strained housing affordability; however, new construction was already getting smaller before mortgage rates spiked.
In fact, Parcl Labs data shows that 2023 marked the 9th straight year that new single-family homes got smaller, going from a median square footage of 2,328 in 2014 to 2,036 in 2023.
“While the median size of single family home square footage has remained constant over the last 10 years, with a notable exception being during the pandemic where larger homes were trading hands as consumer preferences shifted from urban environments to suburban environments, new construction footprints have declined over 12% over the last 10 years,” writes Jason Lewris, co-founder of Parcl Labs.
Elm Trails, a Lennar community in San Antonio
While passing through Elm Trails, a community being built by Lennar in San Antonio, Scott Davis took the photo above last year. Single-family homes in the community range from just 350 square feet to 660 square feet and were priced last year from $135,000 to $171,000.
In the grand scheme of the U.S. housing market, tiny home communities like Elm Trails are still outliers. However, Davis, who is the president at Location Strategy, a real estate consulting firm, has seen more builders consider smaller lots and homes given the ongoing affordability crunch.
“Over the last few years we have seen home sizes decline slightly in response to pricing pressure. But that's after 40 years of increasing home sizes. What's new is builders are now going small—building homes that are similar to what we saw in the very early postwar suburbs. Builders are responding to more than price; the move to smaller houses is a result of demographics: more single households, fewer children and families having children later in life. Lack of buildable land is also a factor—builders have been pushed to sites previously considered undesirable for single-family [homes] where more lenient restrictions allow them to experiment with products that are more affordable and more responsive to the needs of a broader array of consumers,” Davis tells ResiClub.
In the view of James Hughes, a land developer in Charleston, S.C., this gradual shift to smaller lots and smaller homes is being pushed more so by “entitlement groups” who are trying to get as much development into the building plans as possible before exiting at top dollar.
“The market has been flooded with high density sites from entitlement groups. Entitlement groups are not land developers and they aren't home builders. These entitlement groups put land under contract, get the required permits, and have the site engineered. Then they sell "paper lots" to land developers and home builders. Land developers and home builders don’t necessarily want the high density, but that's what's on the market,” Hughes tells ResiClub.
Hughes added, “This is one factor contributing to smaller footprints.”
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