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Jun 10, 2025 - Despite Homes Getting Smaller, Unaffordability Persists

• While home sizes have shrunk since before the pandemic, home prices have increased significantly, postponing home purchases for many would-be first-time buyers, according to The Wall Street Journal. Between February 2020 and December 2024, the median size of a new home has dropped by about 50 square feet, according to real estate data firm Cotality. Over the same period, the median price of a starter home has risen 44% to $287,000. However, downsizing homes doesn’t necessarily translate into significantly lower building costs. Lot prices and permitting costs change little as homes get smaller, and some building costs have seen double-digit percentage increases over the past year, further pinching builder margins.
• US residential construction spending declined in April compared to March amid a reduction in the number of new single-family developments and rising inventories of unsold new homes, according to Reuters. In a Reuters survey of property industry experts, 90% of respondents believed the Trump administration’s tariff policies would drive up costs and result in fewer homes being built. A housing strategist with Morgan Stanley said, "Looking ahead through the rest of this year and into 2026, we don’t expect mortgage rates to come down much — at least not through the third quarter of 2025 — so affordability will remain pressured.”

• So-called “missing middle” medium-density housing, which includes duplexes, townhouses, and other smaller multifamily properties, has gained in popularity over the last several quarters, according to the National Association of Home Builders. Multifamily properties in the missing middle (2 to 4 units) have generally been out of favor since the Great Recession, but they are experiencing a resurgence. In the first quarter of 2025, there were 5,000 construction starts for housing properties with 2 to 4 units, which was flat compared to a year earlier. However, over the past four quarters, the number of missing middle residential construction units reached 23,000, marking a 53% increase over the four quarters before that period. The missing middle segment’s gains may be limited absent zoning reform that allows for increased density.
• The Dodge Momentum Index (DMI) increased 3.7% in May 2025 to 211.2 (2000=100), up from the revised April reading of 203.5. The Momentum Index is a monthly measure of the first (or initial) report for nonresidential building projects in planning, which has been shown to lead construction spending for nonresidential buildings by a full year. On a monthly basis, the institutional planning component improved by 10.5%, and commercial planning rose 0.8%. Dodge’s associate director of forecasting, Sarah Martin, said, “Nonresidential planning continued to accelerate in May, primarily driven by strong project activity on the institutional side of the DMI. Planning momentum moderately improved on the commercial side as well, following subdued growth in that sector over the last few months – outside of data centers. Increased economic and policy uncertainty will continue to contribute to heightened volatility in the project data – but in aggregate, planning activity is on steady footing.”