Smaller Homes Are Back in Fashion
Redfin, a national residential real estate firm, conducted a study which concluded that the recent rapidly rising mortgage rates are leading to a strong trend of homebuyers opting for smaller homes. “Rising rates, combined with home prices that are still higher than they were a year ago, have cut more than 400 square feet out of homes affordable to a San Diego buyer on a $3,000 per-month budget.” (San Diego homebuyers suffered the greatest loss of square footage.) This is just one of the very sobering findings of this report. San Diego is one of the 50 most populous U.S. metro areas for buyers with a $3,000 monthly budget included in the study. Indeed, the rapidly rising mortgage rates have cut at least 100 square feet in 29 of the 50 metro areas, according to Redfin.
“Soaring mortgage rates are throwing a wrench into prospective buyers’ plans,” said Redfin Senior Economist Sheharyar Bokhari. “Many would-be buyers are dropping out of the market because they can no longer afford the home they want, resulting in a dramatic dip in home sales. For buyers who need a home right now–and can still afford it, compromise is the name of the game. Some buyers will choose to sacrifice on location or move further away from the city center so they can get the space they want, while others will settle on a smaller home in their ideal location.”
But there may be a silver lining for buyers. When considerable numbers of buyers drop out of the market, the laws of supply and demand take hold: home prices drop, and theoretically, the percent of those price reductions should roughly corelate and compensate for the higher monthly mortgage costs. (According to Reuters, home prices have dropped for eight straight months.) But as of now, while home prices have fallen well below their 2022 peak, they haven’t fallen from a year ago anywhere except the Bay area and a few other places. This is mainly because of the lack of homes for sale on the market.
Today, the typical home affordable on a $3,000 budget is under 1,000 square feet in six of the metros in the analysis: San Diego, San Jose, Anaheim, CA, Oakland, CA, San Francisco and New York. A year ago, only San Francisco fell into that category.
Nevertheless, as rates continue to rise, expect home prices to fall significantly across the country.
But until that happens, many folks will continue to opt for smaller homes.