Economists, analysts, and homeowners have access to a lot of data about the state of the nation's housing markets. Beyond the usual statistics on sales, builder confidence and prices, we can also learn about the status of the sector by examining the kinds of homes being constructed.
One such measure is the average size of newly built single-family homes. Reported in the Census Bureau's Quarterly Starts and Completion by Purpose and Design, the data for the second quarter of 2013 indicate that the average size of a new single-family home was just under 2,600 square feet, as measured on a one-year moving average. At this level, the typical size of newly built homes is larger than the previous peak of just over 2,500 square feet set at the start of 2008.
Some reporting on this data has teased the conclusion that the rise of newly built home size reflects consumer preference for larger homes.
However, this is a misreading of the data. In fact, the rise of average home size is an indicator that the market for newly built homes has experienced a shift in the mix of buyers since the end of the Great Recession. Similar to recent trends concerning homeownership itself, which show relatively larger declines in ownership for younger households, the rise in typical new home size is a reflection of today's economic and lending environment. Higher end homebuyers represent a larger share of total home purchases because such buyers can muster larger downpayments and find it easier to qualify for mortgages. The result is a shifted market mix that has benefitted higher price housing markets.
To see this effect, consider the distribution of newly built single-family home sales by price, as reported in data from the Census.
Several trends are clear. First, during the boom period, the share of newly built homes selling for less than $250,000 fell as prices rose. This share rose during the Great Recession and was near cycle highs during the federal homebuyer tax credit period (the middle of 2008 through 2010).
However, since the end of 2011, the share of new homes selling for less than $250,000 fell as the housing market recovery took hold. And in fact, the August data indicates that for the first time the market share of new homes selling for $250,000 to $500,000 exceeded the share of new construction selling for less than $250,000.
Why? Because in today's lending environment, cash buyers and high wealth buyers have an advantage over other home purchasers, including younger prospective home buyers who face tough labor market conditions and rising student loan debt burdens. Indeed, according to Census data, 24 percent of all new home sales were made to cash buyers in 2012 and the current market share of single-family homes built for rental investors is almost twice the historical average. Thus, the rise in typical new home size is not due to a change in consumer preferences, but rather, it is a reflection of the kinds of buyers that are active in the housing market.
These data also offer a warning going forward. As investor and cash buyers reduce their presence in the market, it is important that the finance needs of the middle class are met, particularly among younger buyers aspiring toward entering the middle class.
This means protecting policies that enable newly formed families to access credit and enter the housing market. These policies include defending the mortgage interest deduction, maintaining the role played by the Federal Housing Administration and ensuring a federal backstop for the secondary mortgage market.
Robert D. Dietz is an economist with the National Association of Home Builders. Previously an economist with the Congressional Joint Committee on Taxation, Robert writes on housing and policy issues at NAHB's Eye on Housing blog and @dietz_econ on Twitter.
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