The Real Estate Market Bets on More Compact Homes

The Real Estate Market Bets: During the crucial spring sales season, home size becomes a strategic factor. First-time buyers face high prices, elevated mortgage rates, and limited supply. In response, builders and buyers are opting for smaller homes as a way to ease transactions and cut costs.

Post-Pandemic Trend Becomes the Norm

Since the pandemic, the size of new homes has declined—a strategy adopted by developers to attract more buyers and control expenses. Although the last quarter of 2023 saw a slight increase, the average home size dropped again in the first quarter of 2024. Since 2022, each quarter has shown a year-over-year reduction in home dimensions.

Less Space, Greater Financial Viability

With mortgage rates reaching 6.86%, many buyers have sacrificed space to meet tight budgets. Carl Reichardt, an analyst at BTIG, explained: “One way to offset higher input costs is to use less, which means smaller, simpler homes.”

Seniors and Young Buyers Adjust Expectations

Navona Hart, a broker in Virginia, noted that near-retirement homeowners have lowered their expectations. “They wanted 2,000-square-foot homes, but end up buying 1,500 to 1,700-square-foot properties due to high prices.” Toi Walker, 34, spent three years house hunting before purchasing a 1,346-square-foot home for $205,000—below her initial goal.

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Preferences Shift, But the Need Remains

A John Burns Research survey revealed that 25% of respondents are looking for homes between 1,251 and 1,750 square feet. In March 2024, the median size of available new homes was 2,034 square feet—a 4.7% drop from 2020. The trend reflects a market increasingly open to compact solutions.

Builders Adapt with New Formats

D.R. Horton increased sales of smaller models, noting that 17% of its closings were for duplexes or townhomes—the highest level since 2006. Jessica Hansen emphasized that while many still prefer single-family homes, townhomes with garages and patios are an appealing alternative to apartments.

Functional Value Over Luxury

KB Home maintains an average size of 2,000 square feet—similar to eight years ago—but buyers now prioritize functionality. “They prefer built-in cabinets and kitchen islands over luxury finishes,” said CEO Jeffrey Mezger.

The Limits of Compact Living

Although smaller homes offer similar margins and lower exposure to costs, some industries—like cabinetry—are beginning to feel the impact. Tyler Batory of Oppenheimer warns of a tipping point: “At some point, buyers may question whether a small home truly beats an apartment.” Still, as long as affordability remains a challenge, this trend appears unlikely to reverse anytime soon.