The median size of new single-family homes has de-clined almost 10 percent from a peak 2,309 square feet in early 2007. More than half the decline occurred in the past year. Prior to the most recent experience, the largest annual decline in median square footage was during the early ’80s recession when the size of new homes declined 8.2 percent

between 1979 and 1982. Within four years of the trough, house sizes were above their previous peak.

Home Size Drivers

Since the Census Bureau began tracking new-home size in 1973, floor space increased 20 square feet per year or about 50 percent over the 35-year period. The increase is not steady. The size of new homes does fall back during recessions but regains the lost square footage and continues to grow. During housing downturns, first-time home buyers increase their share of the purchase market. First-time home buyers have one advantage over repeat buyers; they don’t have a home to sell in a slow market. So, while the whole market declines, the share attributable to first-timers buying more modest homes increases and that drives home size down. In this cycle, the temporary $8,000 first-time home buyer tax credit has amplified first-time home buyer participation and the downward shift in size.

In addition, during slow sales periods repeat home buyers are more cost conscious and may have less equity to roll over so they also buy a more modest home than during healthier housing markets. This trend also is likely to have exaggerated the declining size effect because of abnormally large house price declines in many places. The extraordinary events of this housing downturn could account for the historically greater fall in new-home size.

While new homes have grown, lot size continues to fall. No-growth trends and expensive development regulations and permissions have pushed land prices up and resulted in a substitution effect for floor space over yards. Two-story homes have also become the more dominant style, which allows for added square footage at lower marginal cost. Expectations for continued appreciation and federal tax policy encourage greater housing spending, and space is one component that consumers value when increasing their housing expenditure.

Future Home Size

The not-so-straight-forward question is whether the decline in size will reverse as it has in the past or have we entered a new era in home sizes. I see five reasons why the smaller-size trend may persist longer than in the past.

First, first-time home buyers will continue to account for a larger than normal share of home purchases as potential repeat buyers wait to regain some of their equity before jumping back into the market. Second, repeat buyers who are in the market generally have less equity to roll over and will be more judicious about the price of their next home. Smaller down payments will push buyers to purchase smaller homes, perhaps with fewer upgrades as well. Third, house prices will recover eventually and housing equity will grow but many potential home buyers will remember the first ever national experience in house price declines and will be less motivated to purchase because of appreciation and more because of actual need. Fourth, home buyers are growing more concerned about energy use and environmental sensitivity. The heightened concern for “green” homes will give an advantage to new homes over existing homes but will push buyers to consider less space as one very straightforward way to reduce energy use. And fifth, younger home buyers are showing preferences for more compact, denser developments that are closer to entertainment and recreation opportunities, which includes less space as well.

The trends over the next couple of years project a continuation of the smaller home trend but as price appreciation returns and tax policy remains unchanged, house size will likely grow again as consumers find value in larger spaces.