An Interesting Trend Among New Homes
As a residential real estate appraiser in the Birmingham, AL market for over 30 years I have seen many changes in new home construction. One characteristic I thought I would write about today is the trend in the square footage of new homes.
The housing market is not unlike other areas of our economy where we have seen a decrease in the size or amount of the goods and services that we purchase along with an increase in the cost. Before we look at the most current statistics on the size of homes it’s important to look at the trend in past decades.
Changing Trends in the Size of Homes
While detailed information on square footage was not consistently recorded in the Birmingham, Alabama MLS until around 2010 we can look at national trends to see what was occurring across the country. Based on information provided by the U.S. Census Bureau, home size steadily increased from 1999 through 2008/2009, which we all know was when the housing market crashed.
Before the crash, the real estate market thrived due to relatively low interest rates and good demand. Other factors eventually led to the crash including subprime mortgages, predatory lending, and questionable securitization by lenders, however, that is a topic for another day.
Before the crash, this increase in the size of houses reflected the buyer’s desire for larger homes and the lender’s willingness to loan money for new construction. After the crash, there was a decline in the size of homes which may have been brought on by more conservative lending practices due to the crash.
Over the years the size of new homes has been strongly influenced by various economic factors, but the main one being interest rates. In addition to the financial crash in 2008/2009 and changes in interest rates, other factors have affected home design, including technological advancements and family dynamics.
The Birmingham, Alabama real estate market has experienced significant shifts over the past few decades that have influenced home size trends. As I noted, the 2008 financial crisis had a serious impact on the housing market, causing a dramatic slowdown in new construction and leading to more cautious lending practices. As a result, developers and buyers began to favor smaller, more affordable homes to reduce financial risk. This trend toward smaller homes was further reinforced by a shift in buyer preferences, with many seeking to downsize and simplify their lifestyles in response to an uncertain economy.
Technological advancements have also played an important role in shaping home size trends in Birmingham and other cities across the country. The rise of smart home technology and energy-efficient building materials has enabled homeowners to achieve greater functionality and comfort in smaller spaces. Features like open floor plans, multipurpose rooms, and integrated technology have become popular, allowing homeowners to make the most of their living space without needing to increase the overall square footage. Additionally, advances in construction techniques have made it more cost-effective to build compact homes that are efficient and eco-friendly.
Changes in family dynamics have also influenced the size and design of new homes in Birmingham. With an increasing number of single-person households, empty nesters, and smaller families, the demand for large, multi-bedroom homes has decreased. Instead, there is a growing preference for smaller, more manageable homes that better align with current living arrangements. This demographic shift has encouraged builders to focus on creating functional, well-designed homes that cater to the needs of modern families, ultimately leading to a noticeable trend toward smaller homes in the Birmingham market.
Trends in the Birmingham Housing Market
The Greater Alabama MLS, which services the Birmingham metro area, provides some data regarding the trend in the size of new construction homes. By looking at the median and average square footage of new homes built over the last 10 years we can see that the size of homes has decreased. Check out the following graphs.
Over a ten-year period in Jefferson County, we have seen a +/- 18% decrease in the median square footage of a house and a 12% decrease in the average square footage. The number of bedrooms and bathrooms have not changed so it stands to reason that these rooms have shrunk along with the square footage.
In Shelby County, we have seen a +/- 3% decline in median square footage and a +/- 1% decrease in average square footage.
For both Jefferson and Shelby Counties 2014 did not have the largest homes. Other years had larger homes, however, it should be noted that as of the second quarter of 2024, the current year does have the lowest square footage, which lends support for the definite decline in home size.
While interest rates have slowly declined over the last several decades they changed direction in 2021. Over the past 3 years interest rates have increased to levels we haven’t seen since the early 2000’s, according to Freddie Mac. This decline in consumer buying power has partially influenced building trends. The graph below illustrates the fluctuations in interest rates since 1972.
The increase in interest rates has reduced the amount of house buyers can afford for a given monthly payment. Builders recognize this and have adjusted the size of their houses to make them more affordable.
This increase in interest rates has negatively affected the number of new homes sold. This is more evident in Shelby County than in Jefferson County, where the number of new construction sales has bounced around but not drastically reduced.
Shelby County sales have noticeably declined. The total number of sales for 2024 is still up in the air since it is only August and we have four more months to see what happens. We must not forget that this is also an election year which can create uncertainty in the market and negatively impact the number of sales occurring. The charts below illustrate the impact of the change in the average 30-year fixed-rate mortgage and the number of new construction sales occurring in the Birmingham metro area.
Pricing Challenges
The decrease in house size for new construction can present a challenge to both agents and appraisers when attempting to determine a property’s market value. Smaller homes typically sell for more per square foot when everything else is equal.
When you analyze the price per square foot of a property you’ll find that a lot of factors must be considered. The price per square foot reflects all of the features of the home including its age, condition, features, functionality, and overall appeal.
Comparable selection is very important when pricing a new construction home. It’s important to choose sales that are as similar to the subject property because they will provide the most accurate indication of value for your property.
If you choose older homes as comps they may not be similar in design and appeal or functionality. They may not have some of the newer features that buyers are looking for and are willing to pay a premium for.
If your comps are older homes that are significantly larger this may not give you an accurate picture of the range of value on a price per square foot basis. Because larger homes normally sell for less per square foot and the home may not have the same features the price per square foot will not provide an accurate indication of value for your home.
Effectively bracketing the comparable sales used will give you the most accurate indication of value. By using sales that are slightly smaller, larger, and similar in size to the home being priced you will get a more complete understanding of where your home falls within the range of value provided by the sales.
Bracketing the features of the property such as design and features will also help you understand how these items affect the price of a home. The bottom line is that you want to compare apples to apples to get the most accurate price because this is what buyers will be doing and you want to mimic their actions.
Something that buyers and agents also need to consider is the comparability of the sales. If you are buying an older larger home you do not want to compare it to a newer construction smaller home. As I previously noted, smaller homes usually sell for more per square foot so using only smaller sales will give you a price per square foot that is not realistic for a larger home.
The new construction sales will also have the updated features and design baked into the price per square foot which will provide an elevated price. This will not be comparing apples to apples but rather apples to oranges and this is the quickest way to misprice a property guaranteeing it will sit on the market for too long.
Conclusion
It is a fact that homes are getting smaller while their prices are going up. This has been brought on by economic and societal changes that have favored smaller more efficient homes rather than larger ones.
When pricing a home in today’s market it is important to keep these facts in mind. By comparing apples to apples you will get the most accurate estimate of the value of a property and avoid overpricing error.
If I can help you understand the Birmingham real estate market or if you need an appraisal don’t hesitate to contact me and as always thanks for reading.
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