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Real Estate

Why the Recession Brought So Many Supersized Homes to the U.S. Market

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     (Julie Ranee Photography)

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     (Miller + Miller Real Estate)

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     (Our Town Plans)

Since the Great Recession, more new homes have been selling at what we’d call the extra-large size: 4,000 square feet or bigger. Given that many Americans suffered financially during the recession, that might be surprising. Wouldn’t it make more sense for home sizes to go down during an economic downturn, not up? Here’s why new homes have been trending in the opposite direction of what you might expect.

Related: So You Want to Build - 7 Steps to Create a New Home

New Home Sales Are Down

First, let’s go over some numbers, starting with the fact that fewer new houses are selling these days than before the recession, which began with the economic and housing crash of late 2007 and lasted until mid-2009. In 2005, a year before the peak of the housing bubble, new homes were practically flying off the market at a rate of 1.283 million per year. Last year, they sold at less than half that rate. In other words, new homes are selling at a much lower volume than they used to be, according to the U.S. Census Bureau.

 

A Greater Share of New Homes Sold Are Big

As the total number of new home sales has come down, the proportion of these homes that are large has gone up.

  • In 2005, homes 4,000 square feet and up accounted for 7 percent of new home sales.
  • In 2015, homes 4,000 square feet and up were 11 percent of new home sales.

That’s an interesting shift in a decade — especially after a time period when many people’s finances had become more constrained.

A Smaller Share of New Homes Sold Are Small

On the flip side, a smaller share of the new homes selling are 1,400 square feet or less.

  • In 2005, 9 percent of new homes sold were 1,400 square feet or smaller.
  • In 2015, 4 percent of new homes sold were that size.

To look at it another way, in 2015, nearly three times as many extra-large new homes (11 percent) sold compared with small ones (4 percent).

Note: More homes sold in 2005 overall, so the number of large homes sold that year was greater (about 90,000) than in 2015 (about 55,000).

Why Is This Happening?

The reasons for this phenomenon have to do with simple economics, both for home builders and home buyers.

In recent years, builders have focused on building larger homes because they have financial incentive to do so. “Builders were only building luxury, high-end homes because those were the sure thing,” says Nela Richardson, chief economist at Redfin, a real estate data firm and brokerage. Not only did wealthier buyers have the money to purchase homes, but they were also the only ones who could qualify under tighter mortgage standards.

Other factors in the construction industry have amplified this tendency. “Lot availability has declined,” says Nino Sitchinava, principal economist at Houzz. As lots become more scarce and expensive, and construction costs go up, builder profit margins get squeezed. It makes economic sense for developers to build larger homes, Sitchinava says.

Also, foreclosures are still happening, and homes that are foreclosed tend to be small- to medium-sized. Although the distressed sales rate has come down, it’s still about 23,000 per month, according to Attom Data Solutions, formerly known as RealtyTrac, a firm that tracks foreclosure. That’s more than twice the rate in 2000. With so many small- and medium-sized homes going through foreclosure, builders don’t have incentive to build homes on the smaller end. “It doesn’t make sense to make medium- to small-sized homes when there are so many existing homes that are not doing well,” Sitchinava says.

The result is not enough supply on the more affordable spectrum to meet the demand. As a result, prices of starter homes and small homes are rising at a faster rate than prices at the high end of the market.

Between 2012 and 2015, prices for the most affordable one-third of homes (old as well as newly built) rose 38 percent, while the number of homes for sale in that group fell 39 percent, according to Redfin. Among the highest-priced one-third of homes, prices rose 23 percent and supply rose 36 percent.

Trulia’s data on the nation’s largest 100 metros also shows the supply of homes for sale down 38.6 percent from four years ago. The supply shortage is most striking for “starter” or “trade-up” homes.

Related: How Much Does a Remodel Cost, and How Long Does It Take?

A Ray of Hope

Better news, though, came in the form of a housing report on new home sales last month. The report revealed that buyers bought new homes at an annual rate of 654,000 in July 2016, the fastest pace since October 2007. Builders have been building more new homes as well, at a steady 1 million new homes per year — though that’s still below the roughly 1.5 million each year the country saw from the early 1980s to 2007.

Not only are there more new homes being built, the average sales price of a newly built home also dropped to $294,600, from $310,500 the prior month. That could very well be because builders have begun to build smaller, more affordable homes.