American homes are shrinking and prices are rising

By analyzing Realtor.com data from 150 major metropolitan areas, the research team found that only 18 of them have seen an increase in home sizes in the past five years, all while prices continued to rise. The median home is now over 6% smaller, with prices up by 39% overall, and 52% more expensive per square foot.

The analysis noted that in areas where homes are shrinking, prices are continuing to rise, leading to buyers purchasing smaller houses with inflated mortgages. The trend varies across metro areas, such as Colorado Springs experiencing a 21% decrease in home size since 2019, while listing prices rose by 25%. Additionally, seven of the ten metro areas with shrinking homes are in the South, with four in North Carolina alone.

Ultra-low mortgage rates, remote work flexibility, and a need for more space drove a housing boom during the pandemic. However, as the Federal Reserve increased interest rates to combat high inflation, mortgage rates rose, leaving high home prices and mortgage rates in their wake. Affordability has taken a hit, as the cost of land and construction has also increased.

Builders started constructing smaller homes about a year ago in response to affordability challenges. They aimed to lower home prices by reducing overall home sizes while still providing livable spaces by cutting out dead space or making trade-offs within the homes. Despite the decrease in home sizes, prices have still risen, albeit not as much as they would have if no changes were made by builders. It appears this trend is here to stay for the foreseeable future.