The rising costs of homeownership have created an affordability challenge for home buyers, particularly those entering the housing market for the first time.
Elevated mortgage rates and mounting home prices from inflation have priced many buyers out of homeownership, making renting a more feasible option than saving up for a down payment.
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Although market conditions are tough, buyers are adjusting by pursuing different types of homes.
Berkshire Hathaway Home Services highlights a growing trend with home buyers prioritizing smaller, more affordable homes. However, the supply of these types of homes may not be large enough to match the surging demand.
New housing construction projects will likely target more compact homes going forward to meet buyer preferences and demand.
A young family in their new home. Mortgage rates and rising home prices have made homeownership challenging, but many young buyers are taking a new approach to find affordable homes.
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Berkshire Hathaway Home Services notes smaller houses are more appealing to first-time buyers
Home prices skyrocketed after dropping during the COVID housing market from uncertainty. In Q2 2020, the average home sales price was $371,000, but it jumped to $525,100 in Q2 2022.
Though prices have come down slightly, housing affordability is still drastically lower than in previous decades. Harvard’s Joint Center for Housing Studies found that the median home sales price was 5.6 times the median salary in 2022, the highest level on record.
Increasing home prices and heightened mortgage rates mean that down payments and monthly mortgage payments are higher than many first-time home buyers can afford. However, scaling down home size has become a popular way for buyers to enter the market without breaking the bank.
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The Berkshire Hathaway Home Services blog notes, “Bigger homes used to be more desirable to homebuyers, but between lack of affordability and rising eco-awareness, smaller homes are becoming the new standard.”
Given that saving for a down payment and high mortgage rates are two of the biggest barriers to homeownership, purchasing a smaller home provides accessibility to buyers in a largely unaffordable market.
Berkshire Hathaway Home Services explains the financial benefits of smaller homes
In addition to lower mortgage payments and less accrued interest, smaller and cheaper homes offer another advantage to buyers.
The blog highlights that buyers purchasing a small home will see one major difference in return on investment, noting, “And the icing on the cake? Small homes appreciate faster than larger homes.”
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The combination of smaller down payments, more affordable mortgage payments, and greater long-term returns will likely push more buyers to pursue smaller homes, especially as the average U.S. household size continues to decline.
In the 1980s, when mortgage rates ranged between 12-18%, construction shifted to build smaller homes to meet the demand and budget of the average American. Experts predict that new housing projects will likely follow that trend, as the housing market remains relatively difficult and more buyers will need affordable options.
As mortgage rates remain sticky and inflation continues to hit buyers’ wallets, smaller houses will become increasingly common.
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