New houses continue to get smaller

The trend of building smaller houses continued further last year. The median size of a new single house started in 2023 was 2,179 sq. ft., down 90 sq. ft. from the prior year. Recall that the median is the figure indicating that half of the homes are smaller, and conversely. The average, i.e. mean, house size also fell to 2,411 sq. ft., that is 74 sq. ft. , or 3.0%, smaller than the year before. 

The chart above shows that single family houses have become smaller since 2015, when the largest new houses were built. The median size of a new single family house in 2015 was 2,466 square feet, shown by the blue line in the chart above. That is, houses today are 287 sq. ft smaller, reflecting almost the loss of a full room.

On an average size basis, the biggest new houses were also built in 2015 when the mean size of a single family house reached 2,689 sq. ft. This is 278 sq. ft. more than those built last year.

The steady shrinkage of house sizes can be appreciated better in the chart to the right. It displays the quarterly changes in house size for the last five years. Note that we are using quarterly data here, rather than the annual data shown in the chart above.

The bars represent the change in house sizes from one quarter to the next.  For instance, the average house size fell 60 sq. ft. in the fourth quarter of last year to 2,374 sq. ft.

Also, although we are not showing it here, the number of houses built each quarter changes. There were 259 houses started in Q3 down to 238 thousand in Q4.

Size of Multifamily Housing Units 

A similar pattern is observed in the multifamily sector. That is, new housing units were biggest earlier this century and their size has been almost in a free fall. The only difference is that while both the median and average size of single family houses fell last year, for multi family units we find the average falling to 1,050 sq. ft. in 2023, but the median rose to 1,020 sq. ft. Last year was the only time since 1999, when these data first became available, when the average and median sizes moved in different direction. 

The chart to the right displays the historical annual trend in the size of multifamily housing units. Biggest units were built in 2006, with the median at 1,192 square feet. The average multi unit size was almost 100 sq. ft. larger than the median that year, measuring 1,291 sq. ft. 

One reason for the significantly larger multifamily units built in 2006, when the median size rose from around 1,100 sq. ft. to nearly 1,200 that year, is that a larger number of those units were built for condominium purposes, rather than for apartment rentals. Condominium units, which are homes owned by the persons living in them, tend to be larger and with more amenities than rental units.  

In 2006 nearly half of the multifamily units, 45% actually, were built for condominium purposes. Prior to that year fewer than a quarter of the units were condominium with the significant exception in the early 80s. In 1981 condominiums accounted for 42% of all multifamily units built that year.

Last year, as can be seen in the chart nearby, condos had fallen to just 3% of the multifamily units, the lowest historical level. Incidentally,  a few of the single family homes are also built/sold as condominiums. In 2022 they were less than 3% of all single family houses.

Regional Patterns

Similar to the national trend in the size of single family houses, all four regions also had reductions in house size. The declines ranged from a small drop of 2.2% in the South region, to a relatively large one in the Northeast were the average single family house was 8.4% smaller.  

The average size of new houses in the Northeast region, which always leads the nation with the largest homes, fell to 2,572 sq. ft. This is down from over 2,800 sq. ft. in 2022 and, as can be seen in the chart below, this region's single family homes have also exceeded 2,800 sq. ft. in two previous years- 2014 and 2015.

Builders in the Midwest region produce the smallest houses in the nation. In contrast to the Northeast, new single family houses in this region are always smaller than any other region's. Since 1999, when house data at the region level first became available, Midwest new houses have been 150 sq. ft. smaller than the national average. Last year they were 159 sq. ft. smaller. 

The size of new houses in the South and West is closer to the national averages. The South region's are on average 34 sq. ft. larger than the nation's, although last year were 43 sq. ft. bigger.

The West region's houses have been smaller than the national average since 2009. But overall this region's houses have been 24 sq. ft. smaller. Last year the gap was 72 sq. ft.

Regional Multifamily New Housing

On the multifamily housing side we find that one of the regions, the Midwest, bucked the national decrease in the average size of multi housing units. That is, the average size of multifamily units in the region rose last year to 1,050 sq. ft., just barely higher than in 2022.

The declines in housing unit size in the other three regions were relatively mild. New multi units in the South region saw the largest drop, falling 2.7% or 30 sq. ft. to 1,068 sq. ft.

New multifamily housing units in the West region were 1.2% smaller last year, with a reduction of just 12 sq. ft. in one year. 

Implications of the trend towards smaller houses

Smaller houses naturally imply a reduced demand for a variety of products. For instance, in terms of volume last year's reduction in the size of new single family houses represents a drop of nearly 43 million square feet of floor space. This implies a reduced demand for flooring

materials such as carpeting, wood, or vinyl. 

Although the reasons for smaller houses are unclear, they could be the result of builders trying to reduce costs or simply that consumers are finally demanding smaller houses. The average family size or persons per household has been declining for many years. Additionally, the number of one-person households has increased. All these factors point towards smaller houses. 

New Housing in Metro Areas

 Housing starts fell nearly nine percent last year to 1.41 million units, for only the second annual decline since 2009. Both the single and multifamily segments fell. Single family was down 6.0% to a preliminary 944 thousand houses, but new multifamily construction fell more sharply, down 14.4% to 469 thousand units.

Similarly, the number of housing permits also fell, although by a larger 12%. Total number of permits issued last year was 1.47 million, single family was 6.9% fewer at 908 thousand units, and multifamily was down 18.6% to 562 thousand units.

The right panel in the chart, shows monthly starts and permits data for the last two years. Latest data are for January of this year, with housing starts running at a 1.46 million unit annual rate, and permits slightly higher at a 1.49 million rate. While both starts and permits fell throughout 2022, activity stabilized most of last year.

Based on the Fed's latest pronouncements, we do not expect significant changes in mortgage rates over the next couple of months. This suggests we should not see material improvement or deterioration in the housing markets.  

Last year's decline in both housing starts and permits naturally results of declines in a majority of metropolitan areas. Although new residential construction improved in a number of metro areas.

On a geographic basis, we find that new housing construction is concentrated in a few of the metropolitan areas. The top 15 metros, depicted in the chart to the right, account for 43% of  the total housing permits issued last year. But these 15 are only 4% of all the 387 official metropolitan areas in the country. That is, just 4% of the metros represent 43% of all housing construction.

Along with the nation overall, most of these 15 metro areas saw fewer housing permits last year than in 2022, but three of them actually saw an increase. We can see in the right panel that Nashville permits were 27% higher in 2023 than the prior year, Charlotte saw 8% more permits issued and the Miami-Ft. Lauderdale metro area had 7.7% more permits. 

Note that the two top metros, Houston and Dallas, combined represent 12% of the nation's new housing construction. In other words, one in eight house permits took place in both of these areas. The top six metros in the chart account for one quarter (25%) of the nation's housing permits. And the fifteen metros shows in that chart contribute 43% of the total housing permits.

 Twenty one metro areas account for half of the total permits, and just 58 of the 387 metropolitan areas account for three-quarters (75%) of the total housing permits.

The geographic concentration of housing varies whether it's single or multifamily housing. Although several metropolitan areas are dominant in both market segments, such as Houston or Dallas-Ft. Worth, other metros predominate in either single family or multifamily housing, but not both. Such is the case of Jacksonville, Florida which shows up with high number of single family houses but vary few multifamily, or Minneapolis metro area with high number of multifamily housing but relatively few single family units.

The top single and multifamily housing markets are shown in the chart below.

Finally, for illustration purposes, the two charts below display the trend in total housing permits for each of the top 16 metro areas. The red line in each of the individual graphs represents the growth of total housing permits since 2010. That is, each point indicates the percent change in housing permits from 2010. For comparison, the U.S comparative growth is shown by the black lines. 

The numbers at the end of each line is the average growth in permits between 2010 and 2023. That is, the total growth in the number of permits divided by 14- the number of years. Also, we have colored three of the charts in pale yellow to highlight the fact that permits in these metros grew further last year, unlike the other areas where growth has stalled or fallen.

U.S. Homeownership

Data recently released by the Census Bureau reveals that the U.S. homeownership rate fell to 65.7% in the fourth quarter, down from the year before. The decline was very modest, the rate fell by just 0.3% keeping homeownership within the narrow band it has maintained over the last five years.

The homeownership rate has ranged in the last four years less than one percent, from a low 65.1%, in the fourth quarter of 2019, to the 2022 high of 65.9%. However, the gains made in homeownership between 2016 and 2020, when the rate rose by two percentage points, have stopped.

Further, as can be seen in the chart, the current rate is barely higher than what it was in 1980, when 65.5% of households owned their home. More than four decades of government policies have not made the American dream possible to a greater percentage of households.

But the latest drop in homeownership was not widespread across all age groups. Households headed by a 55 to 64 year-old saw their ownership rise by just under half a percent, 0.3% in fact, to  76%. This is the second highest rate among all ages, as can be seen in the left panel in the chart below.

The biggest decline in ownership was among the youngest households, that is those headed by persons 34 years or younger. Their homeownership rate fell by six-tenths of a percent (0.6%) to 62% in the fourth quarter. Yet this decline does not make a major dent on the gains effected in the five year period 2016-2020, when the homeownership among the youngest households had risen by 3.8%. The under 35 year-old households enjoyed the biggest gains among all age groups in that period.

 

The other groups with a drop in the homeownership rate were the 35 to 44 years, down by two-tenths of a percent (0.2%), and the 45 to 54 year olds, whose rate fell by three-tenths to 70.3%.

Back to the future

The earliest homeownership data by age group from the Census Bureau is available beginning in 1994, even though overall rate for all U.S. households is from 1964.  Based on the age of household data, the national homeownership rate has fluctuated from 64.2% in 1994 to 65.7% today, but rising as high as 69.2% in 2004 at the height of the housing boom/crash earlier this century. 

The 1.5% increase in homeownership over the last 19 years results from gains among the youngest and oldest households, compensated with losses among the middle age groups. Households headed by persons under 35 years rose by just 0.1%, but elder households 65 and over rose by 1.3%.

The homeownership rate among the other three age groups is lower today than in 1994. The 35 to 44 year olds is 2.7% lower, the 45 to 54 is 4.6% down, and the 55 to 64 group is down 3.2%.

Homeownership Among Race & Ethnic Groups

The Census Bureau also provides homeownership data for major race groups, including Hispanics. The left panel in the chart below displays the latest ownership rate for the various groups. White households, as is well known, have the highest rate with 73.8% of households owning their home. Although the rate fell last year by 0.7% it is 3.6% higher than its level back in 1994.

Asian households post the second highest rate, 63% of them owned their house at the end of last year, 1.1% higher than in 2022. Although data for Asian households had not been collected prior to 2016, since that year their homeownership has risen by 6.4%.

Hispanic- and Black-headed households have the lowest homeownership rates, with Hispanic latest rate of 49.8%, and that of Blacks almost four points lower at 45.9%. The homeownership for Hispanics and Blacks had been nearly equal until 2004 when both declined as a consequence of the housing collapse that started that year. But when the housing market began to improve around 2010, the homeownership among Hispanics recovered faster. 

Hispanic households' rate has risen 7.6% since 1994, while Black's have gained less than half, 3.3%.

Politics anyone?

 

Government policies naturally have an impact on housing and homeownership, often unfavorable despite the good intentions. Most dramatic, and damaging it turns out, were the policies enacted in the late 1990s and early 2000s aimed at bolstering homeownership, such as the Community Reinvestment Act. These policies combined with easier lending practices adopted by banks and mortgage companies, and encouraged by the government, led to what came to be known as the subprime mortgage crisis with dire consequences for millions of households who subsequently lost their home. 

For illustration purposes, the chart below displays the path of homeownership for the last thirty years, highlighting the president and his political party throughout this period. Without any deep analysis we can easily see that neither party's policies proved to be more beneficial or detrimental to homeownership than the other party.