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Are Smaller Homes the Cure to Inventory Concerns?

In the blog “Recent Growth of Newly Built Smaller Homes Could Ease the Housing Shortage, but Higher Costs Hamper Affordability” published by the Urban Institute, author Michael Neal notes that should the current pace of home sales continues (6.01 million homes in March) and with the months’ supply of existing homes near its record low (2.1 months in March), the existing for-sale inventory would be exhausted around Memorial Day if no additional inventory is added.

With the recent hurdles noted in terms of the rising cost of lumber tacking on $35,000-plus to the price of a newly-constructed home, and the price of government red tape on the rise, builders continue to face resource cost burdens that make it difficult to produce affordable homes.

“Recent new home sales suggest that building costs can counteract the expected affordability improvements that arise from more new small homes being completed and sold,” said Neal in the blog. “For the housing market to ensure ample affordable housing options remain available, policymakers can seek to reduce production costs by promoting alternative building methods, such as modular or panelized housing.”

With the average size of a new home decreasing due to a small but growing share of entry-level homes under 1,800-square feet, sales of smaller new homes have increased 76% since 2015, compared to a 36% increase in new home sales overall. In response, these “starter” homes saw their share of all new home sales increase from 16% to 21%, less than its share before the housing bust.

3D printing has been found to reduce the need for human labor at a time when home builders are struggling to find skilled workers to meeting housing demand. Many construction workers left the trades after the housing-fueled financial crisis more than a decade ago, and fewer young people are entering the field.

Jason Ballard, CEO and Co-Founder of ICON, said its 3D printing system can do the work of 10 to 20 workers in five or six different trades, working up to 24 hours a day, saving developers time and money. ICON made news in 2018 by completing the first permitted 3D printed home in the U.S., claiming the home had been built in just a day.

Despite speed and materials, to increase the affordability of newly constructed homes, policymakers can provide incentives to builders to build smaller homes and to reduce production costs.

“Even if new building technologies were more heavily used, the housing shortage would not disappear,” said Neal. “High land costs, regulatory constraints on permitting and building design, and financing and delivery challenges may keep new home prices high. But the building of new smaller homes and the price convergence offers the prospect that new homes could provide some affordable supply and could ease the shortage.”

Click here to read “Recent Growth of Newly Built Smaller Homes Could Ease the Housing Shortage, but Higher Costs Hamper Affordability.”

About Author: Eric C. Peck

Eric C. Peck has 20-plus years’ experience covering the mortgage industry, he most recently served as Editor-in-Chief for The Mortgage Press and National Mortgage Professional Magazine. Peck graduated from the New York Institute of Technology where he received his B.A. in Communication Arts/Media. After graduating, he began his professional career with Videography Magazine before landing in the mortgage space. Peck has edited three published books and has served as Copy Editor for Entrepreneur.com.

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