ORLANDO, Fla. – What to Know:
• Newly built homes are getting smaller as builders look for ways to address housing affordability.
• Smaller homes and smaller lots can reduce costs, but that doesn’t necessarily make the finished home affordable.
• First-time buyers are still struggling to find traditional starter homes at prices they can afford.
America’s new homes are shrinking.
If you haven’t noticed lately, since the pandemic, home prices have gone through the roof. In response, builders are trying to solve that affordability problem by squeezing more out of every square foot. And almost in lockstep, homeowners are increasingly treating outdoor spaces as extensions of their shrinking indoor living space.
Taken altogether, one would think reductions would make things more affordable, right?
C’mon now – this is Dollars & Sense and you know we don’t just tackle simple stories.
As builders cut back, shrinking both the homes and the lots they sit on, the final price of a new home is still out of reach for many Americans. And if that new home is supposed to be a starter home, can it still be called one if “starters” can’t afford it?
The incredible shrinking American home
For decades, the American home tended to get bigger. The trend peaked in the years following the Great Recession, when the typical newly built home grew to more than 2,400 square feet, but as of late, builders have started moving in the opposite direction.
The typical new single-family home held steady at about 2,300 square feet from 2019 through 2022. By 2025, it had shrunk to 2,155 square feet. That may not sound like a dramatic difference until you see what builders are up against.
In that same period from 2019 to 2025, the median household income has risen by 24% (good news), but median home prices have skyrocketed, up by 53% (not so good news). Those rising prices are also changing who gets to buy that first home – and when. In 1981, first-time buyers made up 44% of the market and their median age was 29. In 2025, first-time buyers accounted for just 21% of the market and their median age had climbed to a record 40 years old.
And it’s not just the house that’s shrinking – so is the land it’s built on.
In 2025, the median lot for a newly built single-family detached home was 8,543 square feet – less than one-fifth of an acre, with nearly two-thirds (64%) of new detached homes built on lots smaller than 9,000 square feet. Rewind roughly a quarter century to 1999, and only 46% of new homes were built on lots that small.
So, smaller lots, smaller homes, smaller prices?
Nope. And part of the reason is the simple economics of supply and demand. Buildable lots remain in short supply, and in 2025, 64% of single-family builders reported that the supply of lots in their markets was low or very low.
Smaller homes don’t cost that much less to build
When it comes to construction, not every square foot costs the same amount.
Let’s compare two homes that each have 3 bedrooms and two bathrooms: one is 1,700 square feet and the other 2,200 square feet. On paper, the difference in size is almost 23%. But just because one home is 23% smaller, that doesn’t mean it’s going to be 23% cheaper to build.
Both homes need a kitchen. Both also need plumbing, electrical service, HVAC, bathrooms, permits, utility connections, a driveway, etc. Removing 500 square feet doesn’t remove 23% of those costs – in fact, some of the most expensive rooms in a home are the ones you can’t easily eliminate. Kitchens and bathrooms require plumbing, electrical work, fixtures, cabinets, countertops, and appliances while a bedroom, hallway, or extra living space is comparatively simple: walls, flooring, electrical outlets, and perhaps a few windows.
In other words, builders can take square footage out of a house without taking an equivalent amount of cost out of it. Cutting 23% of the square footage doesn’t cut 23% of the construction cost.
Then there are costs that may have little or nothing to do with the size of the house. The land still has to be purchased. Utilities still have to be connected. Permits and impact fees still have to be paid. The land doesn’t care whether a 2,200-square-foot house or a 1,700-square-foot house sits on it. Same thing with utilities – both homes still need a water hookup, electrical service, and a sewer or septic connection. As for permits and impact fees, depending on where you build and the type of fee, some may decline as the house gets smaller while others are assessed per home.
Furthermore, the builder still has financing, insurance, overhead, marketing costs, and ultimately needs to make a profit.
So, shrinking a 2,200-square-foot home to 1,700 square feet may reduce the cost of building it – but don’t expect the construction cost to shrink by the same 23%. In fact, though the smaller house may be cheaper to build overall, it isn’t necessarily cheaper to build by the square foot.
Tall & skinny
There’s another way builders can squeeze more out of smaller lots: building up instead of out.
More than half of new single-family homes started in 2025 had at least two stories. In the South Atlantic region, which includes Florida, that number was 54%. The logic is pretty simple: spread 2,000 square feet across one floor and, ignoring the garage and other features, you’re looking at a footprint approaching 2,000 square feet. But stack the same amount of living space across two similarly sized floors and that footprint can be closer to 1,000 square feet.
Same amount of living space – much less ground underneath it.
That can allow builders to put homes on narrower lots, potentially fit more homes into a development, and spread the cost of expensive land across more houses. In the South Atlantic region, the median lot value for a single-family spec home started in 2025 was $50,000.
Building vertically can also create efficiencies in the house itself.
A 2,000-square-foot one-story home may require something approaching 2,000 square feet of foundation and roof coverage. Stack that living space across two floors and considerably less foundation and roof may be needed. But there are tradeoffs: a second story brings costs of its own. There are stairs, additional structural requirements, and more complicated construction, so taller doesn’t automatically mean cheaper.
And one last thing: Americans are living longer, and not everybody wants to grow old climbing stairs.
There’s a housing mismatch here, too. Many empty nesters are sitting in the larger homes where they raised their families and would like to downsize – but that doesn’t necessarily mean they want an apartment or a tiny house. They may still want a garage, a yard, room for visitors, and enough space to be comfortable. What they don’t necessarily need is all of the house they have now – or the stairs that come with it.
The problem: the smaller, reasonably priced, single-story homes those buyers might move into can be difficult to find. And here in the South Atlantic region, including Florida, most new single-family homes are still being built with two or more stories.
Whatever happened to the starter home?
When it comes to housing, there’s an important distinction between price and affordability. A builder can make a house less expensive than it otherwise would have been by shrinking it – without making the finished house affordable to a first-time buyer.
Because less expensive doesn’t necessarily mean affordable.
That’s where the traditional starter home is supposed to come in. It was never necessarily the biggest house, the newest house, or the house where you planned to spend the rest of your life. The starter home has always been the affordable way to get your foot in the door of homeownership.
As of late, that door has gotten considerably more expensive to open.
According to Realtor.com, the typical starter home now costs about $344,000, up from $256,000 in 2019. And there are roughly 300,000 fewer homes priced below $350,000 on the market than there were before the pandemic. Another sign of the times: in 2019, more than half of active listings – 55% – were below that price. Today, it’s about 38%.
But remember, price and affordability aren’t the same thing.
When you factor in today’s mortgage rates, that same Realtor.com article estimates a household needs an income of about $78,000 to afford the typical starter home. Seven years ago, that income was just $43,000. That’s an increase of more than 80%, while median household income increased about 28% over the same period.
There is a silver lining.
In certain regions, the starter-home market has actually improved since its 2022 low. The Realtor.com article notes the South has added nearly 170,000 sub-$350,000 listings since the trough, helped by construction in Florida, Texas, and the Carolinas. And believe it or not, prices are down. The regional starter-home threshold has fallen from about $323,000 in 2022 to $311,000 in 2026.
Told you it wasn’t all doom-and-gloom.
There’s also one more nugget buried in the Realtor.com article that’s particularly interesting when we’re talking about shrinking homes: since 2019, prices for two-bedroom homes rose 44.5% and three-bedroom homes rose 41%. That’s faster than the increases for four-bedroom homes (36.9%) and homes with five or more bedrooms (34%).
In other words, some of the smaller homes that would seem like natural starter homes have actually seen some of the biggest price increases. So, what happened to those smaller starter homes? They didn’t disappear the economics associated with those smaller homes changed.
Shop for the payment, not the square footage
So, we’ve given you the layout of how homes are shrinking, why smaller doesn’t necessarily mean affordable, and how the economics of starter homes have changed. At this point, if you are looking for that starter home, how do you find the one that’ll fit?
Dollars & Sense has you covered. If you’re a first-time buyer, here are some things to consider:
• Don’t automatically rule out new construction. Builders currently have substantial inventory and are using price cuts and incentives. In June, new-home supply was 9.4 months – firmly buyer-friendly territory. In fact, in June, the national median new-home sale price was about $398,300, versus $440,600 for existing homes.
• But shop existing homes, too. An older home may offer more house or more land for the money in a particular neighborhood, but you have to account for repairs, insurance, energy costs, and maintenance. The sticker price alone doesn’t tell you which is cheaper to own.
• Compare the monthly cost, not just the purchase price. Mortgage rate, insurance, property taxes, HOA/COA/CDD fees, maintenance, and builder incentives can completely change the equation. That’s particularly important now because Realtor.com’s starter-home analysis says the principal barrier for entry-level buyers is increasingly qualifying for the purchase, even where inventory has improved.
To wrap this up, decide what you can comfortably afford before deciding how much house you want. Why? Because builders have figured out plenty of ways to shrink the American house, but your mortgage payment isn’t necessarily one of them.
