| Demand for Small Homes? You Bet! |
| Written by Jonathan Smoke | |
| 02.21.2008 | |
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Discuss this article on the forums. (0 posts) A comment posted this week to my article on demand and supply being determined in submarkets and within price point segments deserved more than just a simple reply. The question was: Is there a demand for smaller housing projects either considered second homes or cabins or even primary residences in the 1500 square foot range?  Conventional wisdom suggests that bigger is better. After all, new homes in the U.S. have steadily risen in the average size over the last 50 years. According to the NAHB, the average home built in 1973 was 1,660 square feet, and in 2007 it was 2,512 square feet. But the rate of growth in size is slowing, and many expect the average size of new homes to not change much over the foreseeable future.Working against a trend towards larger home sizes are several very important trends: declining sizes of households, increasing interest in energy efficiency, increasing land costs and declining affordability, and reverse migration trends towards urban centers or work centers. Also averages can be very misleading to make you believe that small homes aren’t being built now. Just because the average new home in 2007 was 2,512 square feet, it doesn’t mean that the majority of homes built were 2,512 square feet. In fact the median was almost 300 square feet less, so that means in the distribution of homes completed in 2007, there were as many homes that were smaller than 2,200 square feet as there were larger, and in fact the largest homes are skewing the average. That’s enough of the statistics. Let me share something far more practical. Last week I mentioned that we were a sponsor of the 2007-2008 Consumer Preference Study by the NAHB. We’ve been working through the detailed survey data to combine with our own preferences research at Rating Insights. What I am aiming for is a clear statement of the major home buyer segments and what they most want in a home and community. What we have found already confirms what we have been seeing for years, but it defies conventional wisdom. There are clear segments that want smaller homes, and those segments are not limited to so called “first-time homebuyers.” So far, we are calling this segment “Small Home Seekers.” And we roughly defined a small home as smaller than 1,600 square feet. These Small Home Seekers are the least ethnically diverse group of home buyers in that they are predominantly white, non-Hispanics. They are older in age—72% of them are 40 or older. But they cut across income groups so they aren’t limited to first time home buyers. In fact, given the ages and incomes it is highly probable that they are not first-time home buyers in most cases. And what defies conventional wisdom about these small home seekers is that they want smaller homes and lots in order to have a better house in a better location. They want the ability to customize, they want better or best amenities, and they prefer a higher level of upgrades. From my experience there are few builders and developers who even remotely get this segment. That’s probably why out of all of the segments we are finding from the preferences research this group least prefers new construction. I’d be willing to bet that their preferences for new construction would increase if builders could actually deliver high quality, feature rich smaller homes on smaller lots in great locations. This is one great example of what research can do for builders and developers. The easy path is to just guess and follow conventional wisdom and the rest of the pack and then struggle to sell commodity product built to appeal to the average buyer. The smarter and more profitable path is to get some intelligence to find opportunities to deliver great product that aligns directly with what home buyers want. We’re working on an easy to understand analysis of the complete set of segments we are finding and what the preference data indicate about the ideal homes and communities to appeal to those segments. Stay tuned to hear about this research, or contact us to make sure we let you know about our segmentation study as soon as it is ready for release. 
We're always looking for feedback from our readers.
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