As the spring home selling commences after an unseasonably cold winter, recent housing data provide a useful reflection of the state of economy and how individuals and families are faring after the end of the Great Recession. In particular, the rising average size of new single-family homes suggests the housing market is recovering among wealthier homebuyers but continues to lag among first-time homebuyers.
Quarterly data from the Census Bureau clearly reveal that the typical size of a newly built single-family home is on the rise.
On a four-quarter moving average basis, the median size of a newly built single-family home rose to 2,272 square feet at the start of 2007. During the recession, new home sizes fell more than 7 percent as consumers held back on purchases of housing and other durable goods. But that decline was temporary. As the market began to recover, typical new home sizes matched the 2007 peak and continued to rise in 2012 and 2013. As of the last quarter of 2013, the four-quarter moving average of median new home size rose to 2,471 square feet, an increase of 17 percent from the cycle low.
So are new homes getting larger because the economy is roaring? Actually, the rise in both the medians and averages are a reflection of an ongoing weakness in housing – a lack of first-time homebuyers.
The data graphed above are due to a change in market mix of homebuyer more than changing preferences among homebuyers. Higher-end homebuyers, particularly older homebuyers with cash reserves necessary to meet today’s down payment requirements, are in the new home market in greater proportions than first-time homebuyers who typically purchase smaller homes. The result of this change in market mix is, at least in the data, rising average new home size on an average basis.
A lack of first-time buyers is a problem for the existing home market as well. According to the National Association of Realtors, in February only 28 percent of purchases of existing homes were due to first-time homebuyers, down from 30 percent a year earlier and off the 40 percent level that is considered normal.
This lack of younger buyers is seen in the typical sizes of new multifamily homes as well.
Similar to new single-family homes, the average size of an apartment declined at the beginning of the Great Recession. But unlike single-family, the typical size of multifamily units has not changed appreciably since the start of the recovery.In part, the lack of growth for multifamily size represents the fact that the newly built for-sale multifamily remains depressed. For example, during 2003 about three-quarters of new multifamily units were built as rental apartments. Ten years later, that share stood at more than 90 percent. When the condo market recovers, the typical size of new multifamily homes will rise as well, but the lack of an important base of condo buyers – first-time home buyers – is holding back this development.
The declining homeownership rate of younger buyers has in turn resulted in both an increase in demand for rental housing, as well as contributed to the rise of multigenerational households – families with three or more generations present. In fact, recent Census data indicated that nearly 5.6 percent of total family households were multigenerational in 2009-2011, up from 4 percent in 2010 and 3.7 percent in 2000. These trends have had design impacts on the kinds of housing supplied by builders.
So what can be done to help prospective first-time homebuyers?
A fundamental improvement could be achieved by focusing on policies that support income growth for younger households. As the data above show, younger families have been particularly hurt by income declines in recent years. Since 2000, the median income of households headed by individuals 25 to 34 has fallen by more than 13 percent.
And while most age groups suffered income declines over the last decade, recent trends have not been encouraging for younger Americans. For instance, from 2011 to 2012 only two age groups suffered declines in income: 15 to 24 year-olds (1.6 percent decline) and 25 to 34 year-olds (0.9 percent decline). These are the key ages for marriage, child rearing and homebuying (and student loan repayment), which means ongoing income declines for these households will have long-run economic and demographic consequences.
For these reasons, current political debates concerning the future of housing finance and tax policies will affect the future of housing and the overall economy. In all of these debates, it is important to consider the generational impacts in addition to other policy metrics.
As an example, the cost of buying a home with a mortgage will be determined by the outcome of mortgage finance reform, which will eventually establish a replacement for Fannie Mae and Freddie Mac. A step in the right direction is the discussion draft from Sens. Tim Johnson, D-S.D., and Mike Crapo, R-Idaho, that would ensure an efficient and liquid secondary mortgage market with an explicit federal backstop.