Demand is growing year after year for homes that are increasing in footprint. The starter homes of today’s first-time homebuyers look more like forever homes for the generations that preceded them. As a result, homebuilders are constructing new homes that can support the demands of buyers while also reaching desired profit margins, all resulting in larger homes.
The way Americans live in their home has changed over time. According to Pew Research, 6 in 10 Americans now more than ever prefer houses that are larger and farther apart from their neighbors. The nation’s builders are meeting this demand by creating sizable options for homeowners.
What Does a Starter Home Look Like?
Traditionally, starter homes are under 1,800 square feet with three bedrooms or less. They are a more economical choice for those entering into homeownership in terms of the home price, maintenance, and utilities.
Average home size over the decades:
- 1950: 983 sq. ft.
- 1960: 1289 sq. ft.
- 1970: 1500 sq. ft.
- 1980: 1740 sq. ft.
- 1990: 2080 sq. ft.
- 2000: 2266 sq. ft.
- 2010: 2392 sq. ft.
- 2020: 2484 sq. ft.
Over time, the average square footage of homes has steadily increased. The size of new single-family homes peaked in 2015 at over 2600 square feet and began a downward trend from 2016-2020. However, the median size of a single-family home is experiencing an uptick again. In 2021, it increased to an average square footage of 2540, a sign of consumer demand in the post-covid economy as well as an increase in land values driving Home Builders to increase their square footages to normalize margins, due to an out of balance land value as a percentage of home values.
What Dictates Home Size?
Several factors affect home size trends:
- Builder Incentive—The materials to increase the size of a home are a small percentage of the overall construction budget and a cost-effective way to increase the buyer’s perception of value as well as the Builders gross margin.
- Zoning Laws—Laws designed to maintain the reputation of a community require minimum square footage or lot size.
- Buyer Demand—Homeowners want a variety of amenities in their homes, which means more space to accommodate these lifestyle needs.
- Investment Opportunity—Many buyers consider the resale value and feel that larger, more upgraded homes will perform better in the real estate market.
Predicting First-Time Homebuyers Desires:
The size of starter homes is determined by what first-time homebuyers are willing to purchase. According to the 2021 Consumer Housing Trends Report by Zillow, Millennials (homebuyers between the ages of 27 and 41) represented an overwhelming 37% of homebuyers. This generation is known for setting precedence, and that trend continues with entry-level homes.
The Millennial generation is waiting longer to purchase a house than generations prior. In general, they are more transient in their 20’s, opting to travel before settling into a property. They are also starting families later in age, and many are paying off student loans before seeking mortgage approval. After deferring homeownership by nearly a decade, they are further into their income-earning years. First-time homebuyers are ready to take advantage of low mortgage rates and want more space in a home.
Additional Consumer Housing Trends to Consider:
- Characteristics they value in a home- number of bedrooms, ample storage, and design upgrades
- Household Composition- how many people live in the household.
- Location- Nearly half of buyers (44%) bought in a suburban area, while 38% identified their neighborhood as urban, and 19% as rural.
Home Builders Have Demand for Larger Homes
Today’s homebuyers are looking for a residence that can do it all. They want a home to meet multiple purposes but need it at an affordable price point. This leaves builders to juggle rising material costs, high buyer demand, and stringent zoning laws.
Ali Wolf, chief economist at Zonda, in an interview with MarketWatch, stated, “Builders are really struggling with, ‘Should we build larger homes that may have to come with a larger price tag? Or do we keep building attainable homes and figure out creative solutions so that people can still use their home as a gym and as a home office, but they can also afford it without stretching their budget?’”
Builders are focusing efforts on more expensive projects to offset the high costs and gain the highest return on investment. A research summary from Fannie Mae showed that homebuilders have decreased confidence in building and selling smaller starter homes.
- 42% believe there are lower profits on starter homes.
- 44% stated that their biggest hurdle in constructing smaller homes is buyers being unable to get qualified.
- 52% find larger builds to be more interesting projects
- 31% see a higher demand for larger builds.
George Ratio, manager of economic research at Zillow.com points out that, “The pace of new construction reflected homebuilder shifts toward higher-margin projects amid fluctuating costs. Completed new homes have been mostly aimed at the premium segment of the market, with the share of new home sales priced at or below $300,000 dropping from 43% of the total in 2018, to 32% in the first half of 2021.”
The Future of Starter Homes
Starter homes still exist; they just look different from 50 years ago. Builders are constructing homes to meet the consumer demands of today. Examples range from a 50-unit condo development to a neighborhood with 4,000 square feet estate homes on sprawling lots. No matter the size of your next project, or the buyer you are selling to, Builders Capital is here to get you the funds to get construction underway.