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.