New homes shrink 40 sq ft; industry not sure what it means

The median size of new American homes shrunk during the second quarter – but barely:

Of the 206,000 homes that went under construction in the second quarter, the median size was 2,479 square feet, according to Commerce Department data released Tuesday. That was 40 square feet smaller—or about the size of a walk-in closet—than the high set in the first quarter.

What exactly this means is unclear.

Entry-level buyers tend to purchase smaller homes. In recent years, many younger people who otherwise would buy a home have opted to rent due to stringent mortgage-qualification standards, relatively sluggish job and wage growth, mounting student debt and preferences for living near city centers, where land and homes are more pricey…

Several economists and builders foresee a gradual leveling off or decline of the median size of newly built homes. Builders such as D.R. Horton Inc., KB Home, Meritage Homes Corp., PulteGroup Inc. and Century Communities Inc. have reported early signs of first-time buyers returning to the housing market in the past year…

David Crowe, chief economist for the National Association of Home Builders, foresees a “moderation” of the median size of newly built homes as more first-time buyers come into the market. But he added that it will take a long time for the shift to be reflected in the national median-size figure, because the factors buoying first-time buyers—a loosening of mortgage-qualification standards and growth in jobs and wages—are progressing slowly…

“If anything, we’re seeing people trying to get into the largest home they can afford,” said Marcie DePlaza, a division president at GL Homes, a Florida builder that anticipates selling 1,000 homes this year at prices ranging from about $200,000 to $2 million. “With interest rates as low as they are, people can push to buy the biggest [home] in the group” that they are considering.

In other words, the data could be taken as pointing in multiple directions. A number of builders and others are at least preparing themselves for the possibility that more Americans, particularly entry-level buyers, want smaller homes. Yet, the big homes make a lot of money and wealthier buyers are a known quantity.

In situations like this, I imagine the housing industry would try to hedge its bets both ways. Playing it conservatively might work better in the long run though it might mean that some opportunities are lost. Some of these trends – such as Americans eventually wanting smaller homes – have been discussed for decades. Still, it takes time for some of these factors to work themselves out such as the behavior of younger homebuyers or the overall state of the economy or whether homeownership is promoted by politicians.

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