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The McMansion isn\u2019t dead yet, but homes are shrinking. Last year, the median new home size fell to its lowest point in more than a decade, census data shows. The median single-family home size dropped roughly 4% between 2022 and 2023; it hasn\u2019t been that small since 2010.\u00a0<\/p>\n
Maybe it\u2019s the starter home that\u2019s dead. Almost a year ago, Ali Wolf, chief economist at the housing-market data company Zonda, told me the $300,000 starter home was going extinct<\/a>. The share of new home projects under $300,000 was declining all across the country. We\u2019ve got to go back a few years to understand why that is.\u00a0<\/p>\n The pandemic fueled a housing boom; people were working from home and wanted more space, and they could move wherever they wanted. Historically low mortgage rates<\/a> helped, too. Home prices skyrocketed in light of demand, and not too long after, mortgage rates reached a more than two-decade high as a result of surrounding economic conditions (which sent the cost of building and land values up, too). That\u2019s all to say, housing affordability has deteriorated\u2014so homebuilders are building smaller homes.\u00a0<\/p>\n Builders can\u2019t change the cost of land, or the cost to build, or how much home prices have gone up, but they can change home sizes. But it\u2019s not really bringing back the $300,000 starter home. Wolf\u2019s team has even changed their definition of entry-level to under $400,000. That\u2019s where shrinkflation comes in: Homes are shrinking, but prices aren\u2019t really coming down. To be clear, the median sales price for new houses<\/a> has<\/em> fallen slightly over the past two years\u2014at its peak in October 2022, it was $496,800, and as of January, it was $420,700\u2014but there\u2019s likely many factors at play, and smaller homes could be just one of them. Not to mention, new home prices rose for roughly four years beginning in 2018, when home sizes started shrinking over a five-year period, per Zonda data.<\/p>\n In May of last year, Fortune<\/em> reported<\/a> that builders had no choice but to build smaller homes because of how unaffordable housing had become. \u201cThere\u2019s really this active response by the builders to address these affordability concerns head-on, and one of the main kind of levers that they\u2019re pulling is reducing home square footage,\u201d Matt Saunders, senior vice president of building products research at John Burns Research and Consulting, told Fortune, <\/em>at the time.<\/p>\n However, Saunders\u2019 research, based on an annual survey of architects, found it wasn\u2019t a uniform reduction, but rather a trade-off within the home. Kitchens and ground-floor outdoor space, or backyards, were deemed more important than secondary bedrooms, or guest rooms. Saunders explained it was a trend that predated the pandemic, but accelerated with it\u2014and would continue as time went on given that almost half of the survey\u2019s respondents anticipated that new homes would be even smaller in square footage the next year. His team forecasted the average square footage for new single-family homes would decline by roughly 3% last year, and 2% this year.\u00a0\u00a0<\/p>\n More than three months later, Fortune<\/em> reported<\/a> builders were yet again solving for affordability constraints by building smaller homes. Zonda\u2019s chief economist Ali Wolf told Fortune <\/em>that between August 2018 and August 2023, new homes across the country fell from 2,681 square-feet to 2,420 square-feet\u2014a 10% reduction in five years.\u00a0<\/p>\n \u201cBuilders have become increasingly aware of how bad affordability challenges are today, and that they need to do something to continue to be successful,\u201d she said. \u201cAnd in this case, they\u2019re trying to lower the overall home size to help lower the overall home price.\u201d<\/p>\n A Livabl by Zonda survey found the number one answer builders gave in response to if they were changing their product to lower costs and sales price, was yes, with smaller homes. Not unlike Saunders, Wolf mentioned her team viewed it as \u201cright-sizing,\u201d in that builders were looking for dead space to cut. And again, this was a pre-pandemic trend, although during the pandemic, there was a period of time when builders built slightly larger homes since that\u2019s what people wanted.<\/p>\n \u201cWe were already starting to have a decline in overall home size going into the pandemic\u2014and so this is really picking up where we left off,\u201d Wolf said. \u201cAnd that\u2019s because even before the pandemic, we were concerned about affordability and that\u2019s still builders\u2019 focus today.\u201d\u00a0<\/p>\n Homes are shrinking, but prices aren\u2019t necessarily coming down meaningfully or fast enough (cue shrinkflation). And from December of last year to January, the median sales price for new homes actually went up, from $413,000 to $420,700\u2014perhaps a signal the downward trend in pricing over the past two years was temporary.<\/p>\n<\/div>\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n