"This pattern was exacerbated during the current business cycle due to market weakness among first-time homebuyers," wrote Robert Dietz, NAHB's chief economist. "But the recent small declines in size indicate that this part of the cycle has ended and size should trend lower as builders add more entry-level homes into inventory."
Sales of newly built homes jumped more than 12 percent in July compared to June, according to the Census, and the biggest increase was in homes priced in the mid to just below midrange. The median price of a new home sold in July fell 1 percent compared to July a year ago. Again, not a huge drop, but a reversal from the recent gains in new home prices.
"The majority of it is a question of affordability," said Bob Youngentob, president of Maryland-based EYA, a builder concentrating largely in urban townhomes. "People want to stay in closer-in locations, at least from our experience, and closer-in locations tend to be more expensive from a land and development standpoint and so, the desire to be able to keep people in those locations is translating into smaller square footages and more efficient designs."
Financing is also playing a big role in home size, even out in the suburbs. Mortgage underwriting, especially for government-insured loans, is still tight and the bigger the loan size, the tougher it is to qualify.
"At 3 to 3.5 percent mortgage interest rates, you'd think they would be very affordable, but all of the financial requirements for higher FICO scores and larger down payments and all those other things and income ratios have made it harder, even with a low interest rate," said Stephen Paul, executive vice president of homebuilding operations at Mid-Atlantic Builders, also in Maryland. "In our market it's been financing is driving the deals and builders are adjusting their product to meet the affordability issue."
Even luxury homebuilder Toll Brothers, which beat expectations in its fiscal third-quarter earnings, saw a drop in its average price of net signed contracts. This may be a reflection of more smaller homes selling. With the improving employment market, builders in general are finally seeing more demand for entry-level product. Both Lennar and D.R. Horton are the first of the big public builders to shift focus back to that lower-priced, smaller home.