You may have heard of shrink-flation or experienced it when opening a bag of chips. Well, it is coming to your house because Assets has already reported. Houses are getting smaller and their prices are rising. The average American home is 128 square meters smaller and $125,000 more expensive than it was five years ago, according to a recent analysis by the service journalism group USA Today Home front.
The research team used data from Realtor.com to examine changes in asking prices and square footage in 150 of the most populous metropolitan areas. In only 18 of these areas did homes get larger over the past five years. But in all of these areas, prices increased. Essentially, the average home is now more than 6% smaller, while the average price is 39% higher overall – and 52% higher per square foot.
“Metropolitan areas with shrinking living space are becoming increasingly more expensive per square meter,” the analysis states. “Basically, building smaller houses does not stop the price per square meter from rising, so buyers are left with a smaller house and an excessive mortgage.”
However, “the prevalence of the phenomenon varies across metropolitan areas,” the analysis says — like everything in the real estate world. Colorado Springs homes have shrunk the most since 2019, by 21%, while asking prices have increased by 25%. Not to mention, seven of the 10 metropolitan areas where homes have shrunk are in the South, four of them in North Carolina alone. In the Davenport metropolitan area, also known as the Quad Cities, on the other hand, homes have increased by about 11% and home prices have risen by 58%. And as for price per square foot, it has risen the most in the Naples metropolitan area, by nearly 88%, potentially another sign of the bubble in Florida.
So here’s what we know: Ultra-low mortgage rates coupled with the ability to work from anywhere and the need for space created a housing boom during the pandemic. Home prices soared, and when the pandemic was over, mortgage rates skyrocketed because the Federal Reserve raised rates to lower hot inflation. What was left behind were high home prices and high mortgage rates. Both have improved slightly: Mortgage rates are lower and home price inflation is slowing. Still, home affordability is at rock bottom. And let’s not forget that land prices and construction costs have also risen.
About a year ago Assets reported that builders had no choice but to build smaller homes – it was their response to worsening affordability. “Builders have become increasingly aware of how bad the affordability issues are today and that they need to do something to continue to be successful,” Ali Wolf of homebuilding data firm Zonda explained at the time. “And in this case, they are trying to reduce the overall size of homes to reduce the overall price of the home.”
Matt Saunders of John Burns Research and Consulting said earlier Assets: “Builders are actively addressing these affordability concerns, primarily through reducing the size of the living space.”
Still, both suggested that homes weren’t really becoming miniature versions of themselves. Rather, builders were looking for unused space they could save or making compromises within the homes. Say they built more outdoor space instead of extra bedrooms. Still, prices on smaller homes have increased, but not as much as if builders had done nothing at all. Either way, it doesn’t seem likely that this will change any time soon.
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