Why small homes are big

Fads and trends come and go, but they tend to stick around longer when propelled by necessity. This may be the case with a new interest among first-time homebuyers in what's being called "micro-housing." If it really catches on, it could provide a reliable inroad for young people who are getting priced out of the traditional real estate market.

The supply of homes on the market hasn't kept pace with demand.

As the housing market has continued to heat up, supply has not kept pace with demand. This has led to home prices in some regions rising out of the range of many first-time, younger buyers - even those with dual incomes. A recent report from the National Association of Realtors found that in 2015, the number of first-time buyers as a proportion of total homebuyers declined for the third year in a row1. The NAR found that only 32 percent of homebuyers were doing so for the first time, which they noted was the second-lowest rate seen since they began tracking this metric in 1981. According to historical data, about 40 percent of the home buying market is typically made up of novice buyers.

Lawrence Yun, chief economist at the NAR, further remarked that these findings didn't square with what would be expected in the current market.

"There are several reasons why there should be more first-time buyers reaching the market, including persistently low mortgage rates, healthy job prospects for those college-educated, and the fact that renting is becoming more unaffordable in many areas," Yun said, according to the report. "Unfortunately, there are just as many high hurdles slowing first-time buyers down. Increasing rents and home prices are impeding their ability to save for a down payment, there's scarce inventory for new and existing homes in their price range, and it's still too difficult for some to get a mortgage."

The data shows that many younger buyers simply aren't able to save enough for a down payment, mostly because of student debt. As many as 58 percent of first-timers surveyed by the NAR said student loan debt in particular was preventing them from saving enough for a down payment.

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Enter the Micro-home

In response, some builders are constructing communities focusing on micro-housing. One such community in San Diego recently built 50 micro homes, each with a floor plan of no more than 300 square feet. According to one couple interviewed by digital publication Fusion, these homes will sell for a list price of around $45,000.

It's not just debt that's holding first-time buyers back, either. The number of "starter homes" on the market has decreased by 44 percent since 20122. This is making it harder for younger buyers to find a first-time home within their price range, or to "trade up" to a second home that's still friendly to a tight budget.

Therefore, these small homes may represent a great cure to the housing market's current woes. They are generally being built in urban communities to which younger buyers tend to gravitate. Urban areas have plenty of amenities these buyers look for, but also typically boast prohibitively expensive housing. By combining affordability with an ideal location, these homes may prove bigger than the sum of their parts. Still, some worry that this could be an unsustainable short-term bandage to a complicated problem. It remains to be seen how the burgeoning micro-housing movement will impact the availability of homes for first-time buyers.


1National Association of Realtors