Small Homes, Big Demand: An Emerging Trend in the Real Estate Market

By Lucas Donovan Mar 27, 2025

A surge in demand for smaller houses, driven by rising costs, sees an increase in the production of such homes despite inventory shortages.

Owing to climbing real estate prices and hampered sales, smaller homes have become more attractive to budget-conscious buyers. Homebuilders are rising to the challenge, but some economists worry that production rates may not keep up with demand. Data sourced from the National Association of Realtors shows a decrease in the median size of listed homes, from almost 2,000 square feet in 2019 down to 1,791 square feet in 2024.

Likewise, evidence from the Census Bureau indicates a downward trend in the average size of new homes, even amidst a short-lived surge in the last quarter of 2024. Robert Frick, the corporate economist at Navy Federal Credit Union, expressed concern about the speed at which smaller homes are being built. Following a pandemic-induced slowdown in construction, new homes were primarily larger due to a wealthier buyer demographic.

Frick estimates a shortage of approximately 4 million houses in line with population and family trends, describing it as a long-term issue. This lack of inventory is particularly problematic for smaller starter homes amidst rising mortgage rates.

Townhouses have seen a significant surge in popularity due to their relative affordability, accounting for almost 17% of the single-family market in 2024 as compared to 10% in 2009, according to Rose Quint, Assistant Vice President of Survey Research at the National Association of Home Builders.

"The increase in demand for townhouses is no mystery," Quint said. "They're the more affordable option as the costs of materials, plots, and labor continue to rise."

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