Here is some tantalizing news for real estate investors and potential homeowners. The average single-family home size is declining. As a result, this is overall positive for real estate investors.
I used to think the average square footage size of an American single-family home would keep getting bigger, just like my waistline. After all, once something starts in motion, it's often hard to stop.
However, as of the third quarter of 2021, the average (mean) square footage for new single-family homes in America has declined to 2,464 square feet from a peak of around 2,700 in 2015.
This data is from the Census Quarterly Starts and Completions by Purpose and Design report and the National Association of Home Builders.
The Median And Average Size Of New Single-Family Homes
The chart below shows the average and median sizes for new single-family homes on a one-year moving average. As you can see from the chart, homes sizes peaked at the end of 2015 and have been steadily trending downward. The average and median home size is now back down to 2012 levels on a one-year moving average basis.
2012 is an important year because 2012 is when real estate prices took off across many parts of the country.
The cycle home size low was during the financial crisis in 2009 as homebuilders cut back and homebuyers realized they didn't need as much space. When the world is falling apart, you don't mind sharing a bathroom and not having a family office. Instead, you would probably prefer to rent the smallest shack possible in order to survive.
Since cycle lows, the average size of new single-family homes on a 1-year moving average is now just 6% higher at 2,521 square feet, while the median size on a 1-year moving average is 9% higher at 2,296 square feet.
A Bullish Sign For Prospective Homebuyers
Since 2015, there's been an underlying weakening demand for new single-family homes. From a real estate investor's perspective, four consecutive years of home size declines should be seen as a bullish sign. You want froth to have escaped the system before you buy.
If the decline in average and median size homes continues at their respective paces until 2021, we would be right back to the average and median sizes being built during the bottom of the size cycle in 2009. In my opinion, this is unlikely to happen because America is much richer today.
The previous home size peak was in 2007. Home sizes then declined for 2.5 years before rebounding in 2010. Thus, after four years of home size declines so far in 2019, homes have been declining for 1.5 years longer than during the previous cycle. It is my belief that the end is near for home size declines.
But here's the thing. Home prices didn't immediately start taking off in 2009 when home sizes bottomed. Instead, home prices stopped going down in price around 2009, flatlined for a couple of years, and then started to rise towards the end of 2011. What ensued was a 55% increase in median sales prices until 2017.
In other words, home prices started rising about one year after home sizes bottomed. If we believe that the cycle bottom for home sizes is here after four years, then we should anticipate national home prices to start rising by 2021 at the latest.
Real Estate Looks Attractive
There's always a lag in real estate prices based on fundamentals because the real estate market isn't as efficient as the stock market. It takes time to go through inventory. It takes time for homebuilders to recognize opportunity and build until completion as well.
The correlation between home size and home price isn't an exact science. But we can make a logical conclusion that there is a correlation based on history and microeconomic and macroeconomic fundamentals.
Home sizes could absolutely continue to go down for a 5th or 6th year as Americans embrace frugality and minimalism. But I doubt it due to the incredible wealth that has been generated in the stock market since 2009, the rise in national wages, the decline in mortgage rates, and the human condition of always wanting more.
As a prospective homebuyer, you want prices and home sizes to be declining for at least as long as the previous cycle declined before you buy. You might be able to time the bottom of the next cycle. However, even if you don't, if you have a 10+ year ownership horizon you're probably going to do pretty well.
Of course, there are no guarantees when it comes to investing. Every real estate market is different. Do your due diligence before spending a fortune on physical real estate.
Invest In Real Estate Strategically
Invest in commercial real estate. Take a look at CrowdStreet a real estate marketplace that primarily focuses on secondary metro markets that are lower cost with higher cap rates and higher growth than the expensive coastal cities.
These cities include Denver, Austin, Memphis, and Charleston. Due to technology and the rise of the freelance economy, I think investing in lower cost growth cities will be a multi-decade trend. CrowdStreet is free to sign up and explore.
Invest In Single-Family Homes. Single-family real estate is booming due to declining vacancies and rising rents. If you want to take advantage without being a landlord, invest in the Fundrise Flagship Fund, which has been building a strong single-family home portfolio.
For investors who are looking for income and diversification, investing in a fund is a smart way to go. As an investor, you want to identify trends and ride them for as long as possible. The single-family home market should be strong for years to come.
The Average Single-Family Home Size is a Financial Samurai original post.
There are more reasons to be bullish even from the FRED data around.
I can’t post the graph in a comment but we are at historically low [median sale price]-to-GDP as well!
Houses are secretly at a historical low! Tell that to my wallet after a mortgage payment though :O Weee-ooo
Interesting point about the media sale price to GDP. Saw your tweet. Are you basically that the median sales price should have upside since GDP is so high? I’ll have a look at the chart in more detail. thanks
I’m in the building trade. I’ve noticed an increase in the building of smaller homes valued under $400k when for the last 10 years or so it was focused on the 400k and up homes. It’s an important price break because at the 400k make people buy new homes that they WANT were people now buy homes at under the 400k mark buy the best house they can get for the money. Now with a smaller home under that price they are able to buy a new home without problems.
Makes logical sense. Builders will build to where there is demand. That is an efficient market at work.
My thinking is that the smaller the homes get, the higher the demand and affordability. Then prices follow suit. As an investors, we’ve got to invest in the sweet spot.
One area I hope you had touch on was how the trend in home size affect per sqft pricing (if that data is available).
As a city dweller, we see new condos for sale for a lot of money, with less space than ever. I assume the per sqft price had already been going up, even if median & mean home value hasn’t, which further support Sam’s bullish outlook for real estate.
On the flip side, since we cannot time the market, I don’t see much downside to buy 6 month after the low point vs 6 months before. So I’ll be on the sideline until there are more positive bull signals for real estate.
Price / sqft generally increases the smaller you go. However, the absolute price also goes down. And in this case, the absolute price going down matters more for affordability as buyers make do with less.
Here is a related post about p/sqft: https://www.financialsamurai.com/go-up-the-housing-price-curve-to-find-better-value/
Growing numbers of higher end homes are on the market in all but a very few locations.
This goes back to the baby boomers. They had the wherewithal to buy their big “dream homes” so they were built, but now, as the oldest boomers approach their 80s, they are no longer able to manage so much house, even if they are still alive. Such homes are anything but low-maintenance. Now they are looking for smaller and more manageable, especially if they have lost a spouse, developed medical problems, or are just looking to live near (or with) their relatives, or in assisted living facilities.
Behind them come generations with less money, on average and, possibly, a predisposition to avoid having their life-styles dominated by their houses. Generally, they want more modern homes, or sumptuously refurbished homes. Witness the explosion in television programs featuring home repair and restoration, as well as in building dream houses on a budget.
Many have started to place a premium on having other amenities, such as parks, trails, schools, gyms, and retail stores, all within walking distance, and they are willing, some even eager, to avoid large homes. Instead they often prefer two smaller ones, if they have the means. This dooms many large retirement dream houses to sit on the market longer and longer, especially those that are in places where people retire to, but where there are not a lot of high-paying opportunities for people still working.
And it’s only likely to get worse in the coming decade, as a larger and larger group of the baby boomers continue their march up to, and into, their 80s.
Even the wealthier younglings are not going to be leaping at the bargains to come. Wealthier folks tend to be far more cautious in their purchases and, typically, won’t be rushed. They will prefer to sit back and wait while things are uncertain, and things are very much uncertain.
Probably true. But how long do you wait? 10 years? 20 years? 30 years? We might all be dead in 30 years.
Folks want to live their lives now. Further, these big houses are simply going to be inherited by their children.
Wait? Who said anything about waiting? It is certainly food for thought however, that the big house you buy when you retire at 60 may be more than you can handle in fifteen years.
Further, if, knowing this, you buy it anyway (or build it, in which case you might not be able to get a mortgage), you may be thinking “At some point, when the time comes, we can sell it and move into a nice assisted care facility.”
And then you discover your beautiful dream home has become a white elephant.
Nothing to dictate anyone’s actions, but still something to be considered.
If I had to guess on the trend of housing size before reading this article I would have guessed bigger since it just seems to be the “American way” to continually expand and make everything bigger. So I’m surprised to see how the first chart shows new single family housing sizes have come back down to 2012 levels. I’d guess that they won’t go all the way back down to 2009 levels, but RE isn’t my forte so I’m just guessing. Funny q on people going back to their 2009 weights. I’m definitely heavier now than I was back then!
It’s indeed a contrast compared to the American way of ‘make it big’, but it’s possible that people understand that a bigger home doesn’t always mean better. It’s more costly, there might be a lot of unused space, more years in a mortgage etc. I am personally more inclined to get a small house, maybe with a bigger lot, not to mention the price is still something many of us are sensitive to, as it’s not easy to fork out a million, as I see so many NY homes cost.
Anyway, we’re years before making this step, as we have little money to invest in anything right now. But, in the future, we’ll probably look for something small, that would be better than renting.
Sam, did you make an offer on the house in the same neighborhood that you live in? If so, what is the status? I may have missed a post.
Status coming in a later post.
My husband and I (and child free) decided that we are better off financially investing in index funds rather than buying a home in an extraordinary expensive coastal city where a decent townhome is close to a million dollars. In our city, I have observed the vast majority of people keep buying bigger and bigger homes despite living beyond their means. I wonder if this article is pertaining to the “wealthy” coastal cities? Great article!
The average/ median American isn’t much richer now than they were in 2009. Median household income is up about 7% in real terms, median wealth is still below 2007 levels.
Perhaps you are right with the housing crash that is coming. If I had the money, I would definitely be taking up a few purchases as they are bottoming out. It would be interesting to see how the upcoming U.S. election is going to impact this aspect of the market.
I personally like this trend a lot. As we downsize, we also have to sort out what’s really important for us in terms of material possessions. The trend seems to go towards a more minimalist approach for the younger generations. My two sisters are both 10 yrs younger than me and neither one wants to buy a house with a big backyard. They also love shopping at consigned stores not really out of necessity but for the sake of the environment. I think it’s great! :)
The unemployment numbers are lowest in decades. I’m sure irrational exuberance kicks in and people will want bigger houses and better things.
Reading this article made me realize I’m the weird one who always looks at price per sq ft when buying . Or at least have that metric as an initial screen.
Purchased a sfh in early 2007 as prices were coming down a bit and rates were great and loans were easy. The house is still upside down! Some markets have more than recovered, but others haven’t yet. If pricing improves another 5% then I could come close to breaking even, what a great 13 year investment. I would have been better off putting the money in index funds with all the other bandwagoners.
I believe the average home size will continue to go a down a bit due to a few factors. #1 baby boomers who represent a large share of home ownership will continue to downsize. #2 younger generations are having even fewer children and delaying starting a family. Many that I know are just fine as a couple in a metro area with a small condo or apartment. #3 is that property values continue to rise while many industry wages simply don’t. Eventually people will have to purchase smaller properties out of necessity because it will be all they can afford.
Great point on smaller families going forward versus the past.
Eventually, the average size of a home will be “right sized” for the average family, and demand will surge again.
Hence the purpose of this post. To have a discussion and figure out when that period is.
Based on the age groups that will eventually need a bigger place due to finally having kids and improving finances I’d say that point of surging demand is in the next 3-5 years.
Hi Financial Samurai, always love reading your articles. One factor to consider regarding this real estate cycle and comparing it to previous cycles is the changes made to the federal tax laws regarding home interest deduction and the $10,000 SALT cap. My opinion is these tax law changes are contributing to the decrease in home sizes and americans are finding other areas to invest. While real estate is still a great passive investment, the recent tax changes could be starting to impact the market, particularly in expensive real estate markets on the coasts.
I think you make a good point.
But after doing my taxes, I found the SALT cap deduction didn’t do as much as I feared b/c the standard deduction doubled and mortgage rates went down and I was paying AMT as well. And I’m the target demographic that gets hurt most by the $10K SALT Cap.
So if my results are a reflection of others, I think the hit isn’t as bad.
That said, I remain bullish on the heartland of America!