Let’s get into why builders aren’t producing the smaller, affordable homes that so many first-time buyers are seeking. It boils down to a mix of profit margins, rising costs, regulatory roadblocks, challenges from local architectural review boards, and the need for more efficient construction methods.
First off, for builders, the bottom line is key, and smaller homes simply don’t bring in the same returns as larger projects. The costs of materials, labor, and especially land have been climbing steadily, making smaller homes harder to build profitably. Land in decent locations can be incredibly pricey, sometimes feeling as valuable as gold per square foot.
While it might seem logical that smaller homes should cost less, the reality is more complex. Larger-scale projects benefit from “economies of scale”—the bigger the project, the lower the cost per square foot. This means building larger homes is often more cost-effective for builders, making it difficult to focus on smaller homes, especially when profitability is on the line.
Strict zoning laws and building codes add another layer of complexity. These regulations often set minimum size requirements for homes or lots and sometimes require costly design details. On top of this, local architectural review boards (ARBs) bring their own challenges—and politics. These boards often enforce specific design standards for new builds—such as certain window types and trim, roof pitches, or exterior finishes—that builders must comply with to maintain a community’s aesthetic standards. While these intentions may be good, the rules can price out affordable options and make smaller, more economical builds difficult to realize. It’s almost like they don’t want affordable housing…
The competition between new and existing homes also comes into play. New homes are typically more expensive per square foot, which makes pre-owned homes a more attractive option for first-time buyers. Builders know this and often shift toward higher-end homes that promise larger profits, leaving a gap in the market for affordable starter homes.
Even with these hurdles, there’s a small but promising shift happening. Since around 2015, the average size of new homes has been gradually decreasing, as more builders recognize that not every buyer wants or can afford a large, luxury home. This reflects a shift in consumer interest toward more manageable, affordable spaces, with many people realizing they don’t need an oversized home with a rarely-used formal dining room.
But affordability remains a struggle. While home sizes are shrinking, costs per square foot continue to rise. Builders are also grappling with a shortage of skilled labor and limited buildable land, which pushes costs higher. To make headway, the industry will need to adopt more efficient, innovative construction methods and consider different materials. Modular construction, for example, could help reduce labor costs and construction time, while advances in prefab homes could bring down overall expenses without compromising quality. With better construction efficiencies combined with smart technology, builders could make smaller homes more financially feasible, and drive down overall ownership costs for first-time buyers.
So, what’s the way forward? Solving this issue requires a team effort. Local governments could re-evaluate zoning restrictions and work with architectural review boards to balance aesthetic goals with affordability. Policymakers might consider incentives to encourage affordable home construction, while builders could explore new building techniques to improve cost efficiency. The issue isn’t that builders are ignoring demand—they’re responding to a complex web of pressures. But with creative solutions and collaboration, we can make homeownership a more achievable reality for first-time buyers. Maybe a builder will step up and become the White Knight for this market segment. After all, everyone deserves a fair shot at a place to call home. And, if you’re interested in knowing MORE about this, contact the only Smart Home Certified CRS agent in the Greater St. Louis area, John Donati.
*Based upon actual knowledge the author has at the time of publication.
