As more volume builders amp up more aggressive entry-level–and as Meritage ceo Steve Hilton coins the term “entry-level plus“–neighborhoods, a long-in-coming product mix shift should bring both less square footage and lower price tags averaging in to new home sales data in the year ahead.
Buyer prospects who’ve been shut out of the resale game by poor inventory options will suddenly have some in fresh, newly grand-opened communities designed specifically for rental refugees, downsizing discretionary buyers, and those on a modest budget looking to retire to a modest modicum of entitled living.
Here, National Association of Home Builders chief economist Robert Dietz plots data points from Census Quarterly Starts and Completions by Purpose and Design, to show that new home sizes directionally (on a moving average) are inflecting off peak square footage, and he suggests they’re heading for continued decline. He writes:
On a less volatile one-year moving average, the recent trend of declines in new home size can be seen on the graph above, although current readings remain elevated. Since cycle lows (and on a one-year moving average basis), the average size of new single-family homes is 11% higher at 2,635 square feet, while the median size is 15% higher at 2,424 square feet.
The double-digit percentage expansion has to do with product mix coming out of the Great Recession, where “haves” led the recovery with discretionary purchases of move-up, second time move-up, and luxury new homes. Tight mortgage lending access, cadenced building in light of constrained labor capacity, and price power fueled gross margins kept the balance shifted disproportionately toward bigger, pricier homes, and away from the ones that would pull renters in droves into homeownership.
Now, the offensive shift is on.
Faster, cheaper, farther out, less profitable per unit, more complex schedules, more logistical moving parts, higher interest rates, more pressure, less resources.
Have you got the data you need? Are the workflows integrated so that you’re looking at all the variables on the community, or division, or region you need? Are the supply lines locked-in and secure? Are the signals clear?
Even with vaunted labor constraints weighing on capacity and messing with direct costs, builders will be permitting, starting, and completing more homes, in more distant tracts, with narrower paper margins than they’ve been doing.
But if the economy can shift into growth with lowered regulatory barriers, slashed taxes, and the creation of lots of jobs in infrastructure and industries, that mix shift has only just begun.
Once an inflection occurs, with a little favoring policy on the housing finance and credit access front, the product mix, toward less expensive, smaller jewel boxes could bring median and averages back toward that 2,300 sq. ft. dimension that seems to work best in better times.
