Inflation is hard-felt by typical Americans, even if it seems to be mostly under control on paper. It’s hit the housing market too, only in the form of shrinkflation. Homes are getting smaller—and more costly. In fact, they’re hitting the levels we haven’t seen since 2009 and 2010, after the Great Recession. According to an analysis from research firm Apollo, the median, newly built single-family home is about 2,150 square feet, down 12% from a 2016 peak of 2,500 square feet. All the while, prices are 1.5 times what they were in 2016. According to data from the U.S. Department of Housing and Urban Development, the average cost of a new single-family home in the U.S. was $288,400 in 2016, and today it’s a whopping $437,300. But why is that?Construction costs and pandemic pains For one, there’s an increased cost in building materials. Consider residential construction company BVM Contracting: the company saw a 20% increase in its total material costs post-COVID, Ryan Meagher, a business development manager at BVM and cofounder of the Future of Housing Alliance, told Fortune. When pricing projects pre-COVID that then got delayed because of the pandemic had to be requoted, and many came in about 25% higher than before, he said.“We saw a notable increase in our costs to build a home when comparing pre-COVID and post-COVID, specifically with commodities like lumber,” Meagher said. “The labor costs remained about the same, but it was the materials costs that showed the largest change.”Overall, about a quarter of new homes were downsized to cut costs, according to a July report by John Burns Research & Consulting. Matt Saunders, senior vice president of building products research at John Burns, last year told Fortune that almost every housing market in the country was overpriced because of how much home prices rose during the pandemic followed by a run-up in mortgage rates, and builders were attempting to offset that via a reduction in home square footage. Open concept: an illusion to create space in smaller homesAnd still, it seems the $300,000 starter home is going extinct. “To get a lower-priced home built under $300,000, you’ll either have to build a smaller home or homes in a higher-density setting,” Ali Wolf, Zonda’s chief economist, told Fortune last year. She later explained that the former is the lever builders are pulling. “They’re trying to lower the overall home size to help lower the overall home price,” she told Fortune. Because of that, builders and architects have had to get creative with less materials and space to work with. One way they’ve done this is by including fewer hallways in new home designs.“All that Tetris we played in the ‘90s has finally paid off. Instead of shrinking rooms to reduce overall home size, a common tactic among our architectural designers was to eliminate unnecessary circulation space,” JBREC wrote in its US Residential Architecture and Design Survey report. “Essentially, we’re Tetris-ing the functional rooms together, avoiding wasted square footage on non-functional areas like hallways.” They’re cutting dead space, and banking on an illusion.“The ‘open plan’ has a perception of being bigger because it is open and light is traveling throughout the house giving an optical illusion that the house appears bigger than it is,” Jeff Lichtenstein, CEO of Echo Fine Properties in Palm Beach Gardens, Fla., tells Fortune. “And that is what the consumer wants.”How many degrees of separation are you from the globe's most powerful business leaders? Explore who made our brand-new list of the 100 Most Powerful People in Business. Plus, learn about the metrics we used to make it.
