Those looking for smaller homes to purchase are facing a limited supply:

The first rung on the homeownership ladder has long been an affordable “starter home.” These houses, with their smaller footprints and selling prices, allowed young homeowners to build wealth and upsize as they started their families…

Supply of “entry-level housing”—which Freddie Mac defines as homes under 1,400 square feet—is at a five-decade low.

Surging prices and stiff competition mean there aren’t enough smaller, more affordable starter homes to go around in many regions. The pandemic and subsequent recession, along with the student debt crisis and delayed family formation, contributed to frustration and despair among younger house hunters…

Lately, data from the National Association of Home Builders shows new construction is again giving priority to higher square footage for single-family homes, a trend likely spurred by the widespread shift to working from home and house hunters’ need for more space.

This has been building for years now with the factors cited above (and more – and it may not be the fault of millennials). Builders prioritized larger homes as they can profit more from each units and buyers wanted more features and/or larger homes.

I wonder about the role of local governments. How many urban neighborhoods and suburban communities allow for or encourage the construction of smaller homes. It might take some extra work for a community to work with a developer who is willing to construct smaller and cheaper homes. At the same time, some of the existing members of the community might not be happy about the change as smaller homes are often interpreted as dragging down values and the character of the community. At the least, wealthier communities are unlikely to encourage such homes unless they are at a higher price point – and then it is no longer a starter home.

The article also mentions the financial ramifications of not getting into a house earlier: on average, this lowers the amount of house wealth generated decades later. Might then then shift the emphasis of recent decades away from seeing homeownership as a financial nest egg or requiring a necessary return on investment?