A Fix For the U.S. Housing Market's Affordability Crisis: Building Homes Like It's 1970

The U.S. housing affordability crisis is significantly driven by a long-term trend of increasing home sizes despite shrinking household occupancy, according to U.S. Census and National Association of Homebuilders data. From 1790 to 2019, average home square footage tripled from 831 to 2,496, while occupants more than halved, leading to a 'bigger is better' paradigm that has pushed average home prices from $26,300 in 1970 to over $512,800 in Q2 2023. This trend has effectively eliminated affordable starter homes from new inventory, locking millions of potential homeowners out of the market and indicating a structural challenge in housing supply.

Analysis

The U.S. housing affordability crisis is structurally exacerbated by a long-term trend of increasing home sizes despite declining household occupancy. From 1790 to 2019, average U.S. home square footage tripled from 831 to 2,496, while average occupants more than halved from nearly six to just over two and a half. This disparity has driven average home sale prices from $26,300 in 1970 to $512,800 in Q2 2023, peaking at $525,100 in Q2 2022.

This trend is attributed to a "bigger is better" consumer mentality, fostering expectations of upward mobility through larger home purchases. Homebuilders have responded by prioritizing single-family homes exceeding 2,000 square feet, even as the average new single-family home slightly shrank to 2,200 square feet recently. This supply-side response has effectively eliminated affordable starter homes from new inventory.

The scarcity of smaller, more affordable housing options is locking millions of potential homeowners out of the market, indicating a significant structural challenge in housing supply. This dynamic suggests persistent demand-supply imbalances in the entry-level segment, contributing to the moderately negative sentiment surrounding housing affordability and a market impact score of 0.55.

Key Decisions for Investors

• Investors should evaluate opportunities in developers or REITs specializing in smaller, more affordable housing units or multi-family properties, given the significant unmet demand in this segment.
• Monitor policy shifts and zoning reforms aimed at incentivizing higher-density or smaller-footprint housing construction, as these could materially alter future supply dynamics and investment attractiveness.
• Consider regional market analysis to identify areas less impacted by the "bigger is better" trend or those with proactive affordable housing policies, potentially offering differentiated investment prospects.