All housing starts are equal. But some housing starts are more equal than others.
Housing starts have started to rebound in recent months and with that, the average value of a home. Housing’s switch to contributing from constraining economic growth is a welcome change. While starts are increasing, the homes that are being constructed are notably smaller. According to last Monday’s Wall Street Journal, the average size of new homes climbed steadily until 2007, with intermittent surges higher. In recent years, however, square footage has dropped and is expected to drift even lower.
Credit allows the buyer to do more of something sooner by relying on future wages to repay the loan. Reduced credit has the opposite impact: buyers delay purchases and buy in smaller amounts. In recent years, potential buyers and banks have both preferred larger down payments and better credit scores. The reduction in credit supply and demand shrank the number of starts for a period. Instead of further delaying building homes, buyers have opted for smaller, less expensive homes.
The trend toward smaller homes means new starts won’t have the same economic impact as in 2007. It does mean that people are taking steps to improve their lives in a way conducive to protecting their balance sheets. This is just one more sign of people adjusting and the excesses of the housing bubble slowly being worked off.