Real Estate News

New homes in America are getting smaller

Zillow reports a 9.5% increase in the construction of single-family homes with fewer than three bedrooms from 2021 to 2022.

A for sale sign in front of a beige-colored home with gray-green shutters and a white farmer's porch.
According to Moodyโ€™s, the country currently has a shortfall of 1.5 million homes. Wealth of Geeks

(AP) According to 2020 Census data, the median floor area square footage for single-family homes peaked in the first quarter of 2015 at 2,519. As of the second quarter of this year, it has dropped to 2,191.

Homebuilders have ramped up construction by leaps and bounds to meet the ever-increasing home demand; however, new-home buyers are getting less even though they’re paying more.

According to Redfin, the median home sale price in America increased from $288,203 to $422,137 — a 46% increase between July 2018 and October of this year.

Indiana-based homebuilder Estridge Homes recently introduced detached homes that are $50,000 to $75,000 less expensive and 300 to 500 square feet smaller than regular builds. According to The Wall Street Journal, to downsize new units, homebuilders are eliminating extra bathrooms and bedrooms. Zillow reports a 9.5% increase in the construction of single-family homes with fewer than three bedrooms from 2021 to 2022. On the other hand, there was a 13.1% decrease in the construction of houses with three or more bedrooms during the same period.

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John Burns Research and Consulting (JBREC) conducted a survey in April to understand how much American homes are shrinking. The study surveyed nearly 300 designers, residential architects, and design-oriented builders. They report a third of detached homes planned and built right now are likely to be under 2,000 square feet. The average size of town homes will be between 1,500 and 2,000 square feet.

As the newly built homes are likely to get smaller, builders have allocated more space to more heavily trafficked areas. Instead of building a formal dining room, the focus is shifting to larger kitchen islands with seating. Also, builders are sacrificing primary bedrooms with walk-in closets and opting for another small bedroom.

It is important to note that even though new homes are getting smaller in the United States, they are becoming less affordable. A newly built single-family home had a median price of $415,400 in June 2023. However, in that same month, an existing, similarly sized home was valued at $410,200. Home buyers must still deal with the 30-year mortgage rate, though, but the builders are unwilling to do them a favor by slashing prices.

Understanding America’s housing affordability crisis

America’s housing affordability crisis has not surfaced suddenly. It has been developing for many years. Many experts believe the problem snowballed since the Great Recession and has reached a precarious situation. Families earning the median annual income can no longer afford to buy a home in any of the major markets.

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This housing affordability crisis can be attributed to many factors. First, new-home builds have failed to keep pace with demand in local and national markets for many reasons, including labor shortages. When the housing bubble burst in 2008, a large part of the workforce involved in housing construction shifted to other fields and never came back.

As a result, when the market was ready to bounce back, it didn’t have a sufficient workforce. According to Moody’s, the country currently has a shortfall of 1.5 million homes. The National Association of Home Builders (NAHB) projects the industry needs to hire 2.2 million new workers through 2024 to keep up with the demand for homes built.

Another contributor to the country’s housing affordability crisis is rising home prices coupled with inflation. The median home price across the nation more than doubled between 2009 and 2022. While the growth of people’s wages has been modest, almost every sector of the economy has been affected by inflation. In many cases, the added cost of living leads to less savings for home purchases.

To mitigate the impact of inflation, the Federal Reserve has aggressively increased interest rates. This has also affected the mortgage rates, which are directly associated with the purchasing power of potential home buyers. The single-family homes market in America also suffers from the growing tendency of institutional investors to convert single-family homes (SFHs) into single-family rentals (SFRs). In a market that is already strained, converting a sizeable portion of the available supply has not helped the median home value.

Impact of housing crisis on retirement savings

Lack of affordable housing also significantly impacts an individual’s ability to save for retirement. Harvard University’s Joint Center for Housing Studies has recently published the State of the Nation’s Housing 2023 report, suggesting that in March 2023, purchasing a median-priced home required mortgage payments of $3,000 a month. The same report also mentioned that an income of $117,000 was needed to buy a median-priced home.

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A limited supply of available homes means prices are steeper. Those looking to purchase a home may need to adjust their budget. This can impact their retirement savings in many different ways.

When homeownership accounts for a significant portion of income, there is less opportunity to save for retirement. Therefore, these homeowners may have to lead a low-cost lifestyle after retirement. If the housing market is affordable, it may be possible for a home buyer to pay off the mortgage before their retirement. Then, they can buy another home without debt by selling this home. However, this equity-building strategy is unlikely when home prices rise rapidly. The inability to buy homes in the early working years may mean renting for longer. Those purchasing homes later in life will find it more challenging to pay off their mortgage before retirement. Food, entertainment, and other lifestyle-related costs are also higher in areas with steep home prices. The overall effect of rising prices can put a strain on a retiree’s budget. This is why many Americans nowadays want to relocate to less expensive regions before retirement.

Preparing for the housing affordability crisis

The current housing affordability crisis in America is a matter of concern for everyone. Unfortunately, it isn’t easy to forecast when things will improve. Many experts suggest that one of the best ways to deal with this crisis is to prepare early by accruing savings.

The emerging lifestyle concept of Financial Independence Retire Early (FIRE) can be an excellent option. FIRE practitioners aim to achieve financial independence and retire early by cutting costs drastically and maximizing savings during the early stages of their professional careers. With sufficient savings, FIRE followers may find dealing with the housing crisis easier.

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FIRE may not be an acceptable solution for people unwilling to sacrifice their lifestyle and luxuries. FatFIRE, a modified version of FIRE, can be the right retirement strategy for them. FatFIRE followers must accumulate about $3 million of assets before retirement. Therefore, it is suitable mostly for high-income professionals and entrepreneurs.

This article was produced by Media Decision and syndicated by Wealth of Geeks.

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