Home sizes shrink for the first time in 15 years

At this rate, we'll be living in Hobbit Holes by 2010.

The United States Census Bureau reports that for the first three months of 2009, new homes shrunk by 7% over the same period of 2008. The last time home sizes fell was in 1994.

The average new construction property has 2,065 square feet. According to the National Association of Home Builders, rising energy costs and tightness in the jumbo mortgage market contributed to the fall in new construction.

But those are just short-term factors. Are shrinking homes a long-term trend driven by changing demographics and lifestyles?

If so, the data that we use to evaluate home sales could get complicated. In his book "The Subprime Solution," economist Robert Shiller explains that in the past, home value appreciation appears to have been greater than it really was because homes have been getting larger.

If the new trend is shrinking homes, this will invert and homes will look like they're not appreciating as much as they actually are.

On the resale market, there's a similar problem. Tightness in the jumbo mortgage market has lowered high-end home sales while the first-time homebuyer tax credit is increasing sales at the low end. The result is that median and average home prices may be falling more than the value of any given house is.

How can prospective home buyers and sellers sort all this out? Compare properties and time frames based on square footage with a site like Trulia.com.

If you're working with a real estate agent, ask him/her to give you information on average prices per square foot -- and how the prices have changed over the past few years. In a market as strange as this one, simply looking at median home prices isn't good enough.
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