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Trends in the Housing Market: The Rise of Smaller Homes and Townhouses

Key Takeaways

As home prices continue to climb, there is a growing trend toward smaller houses, with many buyers searching for more affordable options. Recent data indicates that builders are focusing on creating these smaller homes, and townhouses are becoming an increasingly significant segment of the housing market. However, the overall market still grapples with a significant inventory shortage of approximately 4 million homes, particularly affecting the availability of affordable starter properties.

The surge in demand for smaller dwellings is evident. Despite recent downturns in sales, home prices are on the rise, pushing buyers to consider smaller houses as a viable solution for budget constraints.

Builders are responding to this shift by constructing more compact homes, though some experts argue that the output is still insufficient to meet current demands, notably for townhouses.

The average size of new homes has been decreasing since 2015, primarily due to escalating housing costs that have placed financial strain on potential buyers.

According to data from the National Association of Realtors, the median size of homes listed for sale in 2024 has dropped to 1,791 square feet, a significant reduction from nearly 2,000 square feet recorded in 2019.

Further insights from the Census Bureau reveal this trend continues, even with a slight increase in home sizes noted in the final quarter of 2024.

This decline in median home size follows a trend where builders have increasingly focused on smaller floor plans in response to economic pressures.

Despite the market’s need for smaller homes, there are concerns about whether they are being constructed at a sufficient pace. Robert Frick, a corporate economist at Navy Federal Credit Union, highlighted that housing development has decelerated since the pandemic. During this time, the houses that have been built are generally larger, catering to buyers with higher incomes.

Frick noted, “We’re still about 4 million houses below where we should be based on our population and family formation. So it’s a long-term problem.”

Buyers Turn to Townhomes as Inventory Woes Persist

The housing market is currently facing significant challenges, especially regarding the limited inventory of smaller starter homes. High mortgage rates are further compounding the situation by increasing borrowing costs, limiting options for many potential homeowners.

This scarcity of options has led to a marked increase in the popularity of townhomes, which now account for 17% of the single-family housing market, up from only 10% in 2009, according to Rose Quint, assistant vice president of survey research at the National Association of Home Builders.

Quint explained the trend, stating, “There’s a simple reason this is happening: Townhomes are more affordable as material, lot, and labor prices continue to increase.”

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