Why are home prices rising? New homes are getting bigger

by Ryan Smith29 Apr 2015
The rising cost of new homes has led to a 22-year low in homeownership. Between 2010 and 2013, new home prices spiked 18%. But why are home costs rising so much? While tight inventory certainly plays its part, a study by CoreLogic suggests new homes are getting pricier because they’re getting bigger.

In 2010, the average size of a new home was 2,392 square feet, according to CoreLogic. By 2013, the average size had risen to 2,598 square feet – a 9% increase. And new homes didn’t just grow – they came with additional features such as extra bedrooms, bathrooms and fireplaces.

“Given that the new homes being sold today are larger than ones sold just a few years ago, one can easily see why new home prices have surged,” writes CoreLogic’s Sam Khater. “Adjusting for those differences in quality reveals quite a different picture.”
According to the Census Bureau’s constant-quality new home price index, prices on a quality-adjusted basis increased only 9% between 2010 and 2013, compared to 18% on a non-quality-adjusted basis.

“These differences are even larger at smaller geographies,” writes Khater. “For example, in the Midwest, the constant-quality price index increased 7% between 2010 and 2013, compared to 26% for the non-constant-quality index.”

While the difference in size and quality does account for some of the spike in home prices, the primary driver for rapid price appreciation is still tight inventory, according to CoreLogic – particularly inventory of new, affordable homes.

“We may be building higher quality housing for tomorrow, but it could be at the expense of access to homeownership,” Khater writes.
 

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