A silent culprit behind the housing market’s shortage of entry-level homes
Want more housing market stories from Lance Lambert’s ResiClub in your inbox? Subscribe to the ResiClub newsletter. There are a number of factors that explain why there aren’t more small homes in America. Many local zoning laws and building codes favor larger homes by imposing minimum size requirements. Many Americans like big homes, associating them with greater status and wealth. The 2008 housing bust and tightened lending standards drove many entry-level homebuilders out of business. But there’s also another, less talked about reason: economies of scale. Economists use this term to describe when firms gain a cost advantage by increasing their level or size of output. The National Association of Home Builders (NAHB) published a recent report, which made the case that homebuilders—and some homebuyers—see an advantage by going bigger. “In home building, economies of scale may exist in several forms. It is conceivable, for instance, that homes cost less if they are built in larger subdivisions, or by larger companies, where design costs may be spread over a large number of production units,” writes Paul Emrath, NAHB’s vice president for survey and housing policy research. “This post, however, focuses on economies of scale at the level of an individual home. In other words, does cost per square foot decline, all else equal, as a home increases in size?” According to data Emrath analyzed from the U.S. Census Bureau’s Survey of Construction, the answer is yes. As the square footage of finished floor space increases, the median price declines “from a high of $200 per square foot for homes under 1,200 square feet to a low of only $132 per square foot for homes with 5,000 square feet or more,” he writes. Big picture: Building larger homes spreads the fixed costs over a bigger area, which could benefit some homebuyers, who get more for their dollar (i.e., a lower price per square foot), and builders, who can achieve a better margin and total profit (keep in mind that they aren’t sharing all the benefits from economies of scale with buyers).
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Want more housing market stories from Lance Lambert’s ResiClub in your inbox? Subscribe to the ResiClub newsletter.
There are a number of factors that explain why there aren’t more small homes in America. Many local zoning laws and building codes favor larger homes by imposing minimum size requirements. Many Americans like big homes, associating them with greater status and wealth. The 2008 housing bust and tightened lending standards drove many entry-level homebuilders out of business.
But there’s also another, less talked about reason: economies of scale. Economists use this term to describe when firms gain a cost advantage by increasing their level or size of output.
The National Association of Home Builders (NAHB) published a recent report, which made the case that homebuilders—and some homebuyers—see an advantage by going bigger.
“In home building, economies of scale may exist in several forms. It is conceivable, for instance, that homes cost less if they are built in larger subdivisions, or by larger companies, where design costs may be spread over a large number of production units,” writes Paul Emrath, NAHB’s vice president for survey and housing policy research. “This post, however, focuses on economies of scale at the level of an individual home. In other words, does cost per square foot decline, all else equal, as a home increases in size?”
According to data Emrath analyzed from the U.S. Census Bureau’s Survey of Construction, the answer is yes. As the square footage of finished floor space increases, the median price declines “from a high of $200 per square foot for homes under 1,200 square feet to a low of only $132 per square foot for homes with 5,000 square feet or more,” he writes.
Big picture: Building larger homes spreads the fixed costs over a bigger area, which could benefit some homebuyers, who get more for their dollar (i.e., a lower price per square foot), and builders, who can achieve a better margin and total profit (keep in mind that they aren’t sharing all the benefits from economies of scale with buyers).
