The news media is awash with articles that house prices are going to be coming down soon. The statistic used to bolster this claim is that there is now a mismatch between buyer incomes and home prices, and prices will have to start softening to bring these into alignment. The Great Recession of 2007-2009 is often cited where house prices plummeted so we should position ourselves for a repeat performance.
Yet when we look at the situation in the US today, it is nothing like the Great Recession of nearly two decades ago which was due in large part to lax lending standards, huge numbers of resulting foreclosures, and a subsequent large supply of homes on the market. Today, lending is fundamentally sound, foreclosures are relatively low, and Housing supply remains below historical averages for a balanced market.
Today, due to a huge refinance boom during the COVID years of 2020-2022, Freddie Mac calculates from the National Mortgage Database (NMDB) that more than 60% of today’s mortgages are at interest rates of less than 4%. Realtors are indicating that only those individuals who have to relocate due to a life event change are moving, and everyone else is staying in place to continue to reap the benefit of their ultra-low mortgage interest rates that are unlikely to return anytime soon. These “lock-in” owners are restricting the normal supply of homes coming onto the market, and as a result, prices remain stubbornly high. With the Federal Reserve talking about rate decreases, housing demand will likely increase, and house prices can do nothing but continue to remain strong.
So what does this mean for housing in the US? Huge price corrections are not in the cards. To gain some insights as to what may happen, we only need to look at European markets where home prices have greatly exceeded US prices for a long time yet prices there manage to continue going up. How does this happen? By looking at the average square footage of a home in the US vs. in Europe, one trend jumps out. Europeans live in homes that are often less than half the size of their American counterparts. For example, the average home square footage in the US is 2,164 sqft whereas that in France is 1,206 sqft, and the UK is a scant 818 sqft. (World Population Review).
| Country | Average Home Square Footage |
|---|---|
| U.S. | 2,164 |
| France | 1,206 |
| Germany | 1,173 |
| Spain | 1,044 |
| Italy | 872 |
| U.K. | 818 |
Even when adjusted for the number of individuals in the household, a similar trend is observed – Average square footage per person for a US household is often more than double that of European households (Census Bureaus of multiple countries).
| Country | Average Home Square Footage Per Person |
|---|---|
| U.S. | 828 |
| France | 462 |
| Germany | 592 |
| Spain | 376 |
| Italy | 333 |
| U.K. | 355 |
So, this is one way that Europeans are able to manage their incomes and very expensive real estate prices is to simply live in smaller spaces. This is a trend that we are likely to see in the US in the future. And to some degree, it’s already starting to happen.
First, if US new home construction is tracked over the past decade, according to data from the Census Quarterly Starts and Completions by Purpose and Design, the median square footage of new single family homes has declined from its peak of around 2,500 square feet a decade ago to 2,156 square feet today.
Second, as mentioned previously, the average square footage in the US is 2,164 square feet per household. Which states have the lowest average square footage per household currently? A report by Visual Capitalist shows those states are Hawaii with 1,164 sqft, New York with 1,490 sqft, New Jersey with 1,753 sqft, and California with 1,860 sqft. Not surprisingly, these states are ones which already have affordability issues, and they are adapting in much the same way European countries do.
Thus, the most likely outcome is not a precipitous decline in US housing prices. Of course, some markets here and there will adjust with price declines, but for the market as a whole, a continuation of high prices can be expected. The big change, however, is that an era of smaller living spaces may be the new normal that residents of the US can expect for decades to come.
