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Downsizing the American Dream

Shauna Powell and Dirk Williams knew they wanted to buy a home — they just didn’t know whether they could afford one.

“We moved to Denver four years ago and didn’t realize how the housing market was at that time,” said Powell, who, like Williams, is a 34-year-old teacher in the Denver public schools. “When we really started looking for houses, it was difficult to find them in our price range. The prices were just ridiculous.”

The couple found themselves in the position of many young, middle-class Americans — unable to afford the expensive new housing stock built over the past decade. But they found a lifeline in the form of a Denver development from Oakwood Homes. The project, called the American Dream, includes 1,200- to 1,400-square-foot houses priced between $220,000 and $260,000. Powell and Williams moved into their three-story house in late January after snagging it for $257,000.

After years of catering largely to the more affluent market, resulting in slowing sales from too few houses that moderate-income buyers can afford, many developers are starting to address the “missing middle housing.”

The term calls attention to the need for more diverse housing choices at affordable prices. It’s growing into a movement aimed at building more housing for middle-income people at smaller sizes, which leads to peripheral benefits, such as walkability and a greater sense of community. Missing middle housing includes duplexes, courtyard apartments, bungalow courts and multiplexes.

According to data from the National Association of Home Builders (NAHB), more developers across the country are beginning to cater to buyers in the middle, like Reed and Williams.

NAHB data shows the average size of new houses fell for the third straight year in 2018. Median square footage of single-family houses decreased to 2,320 last year after peaking at more than 2,500 square feet in 2015.

Although still above the sub-2,200-square-foot medians hit during the Great Recession, the numbers suggest that entry-level buyers and those looking for starter homes might finally have more options in the coming years. It’s also good news for those who might not be so young but have had issues getting a mortgage because of credit issues.

Robert Dietz, NAHB’s chief economist, said the data probably indicates that home builders are turning toward middle-class housing after spending much of the current economic growth period focused on the high-end development.

“We’ve reached the point where the smaller part of the market needs additional inventory,” he said. “That’s where price growth has been the fastest due to of the lack of inventory. Younger buyers are trying to find entry-level housing.”

Although this is welcome news for buyers looking for an entry-level house, it could prove a negative sign for the economy as a whole. Average new house size tends to correlate with economic figures, with smaller houses built during recessions and larger houses built in boom times. Dietz downplays the significance of the figures as an economic indicator, pointing to rising interest rates and a 10-year low in housing affordability.

“What’s going on is that average new home size really ramped up after the Great Recession, because the market shifted away from entry-level homes,” he said. “Builders are now making up for lost time rather than reacting to a market that has turned.”

Daniel Parolek, principal architect with California-based Opticos Design, who coined the “missing middle” term, points to zoning codes with density maximums and impact fees that remain the same, regardless of housing size, that incentivize developers to build big. For example, if zoning allows no more than two units per acre, the incentive will be to build the biggest, most expensive units possible.

To propel the movement, he recommends using the term “missing middle housing,” rather than terms such as “upzoning,” “density” and “multifamily,” which he says have a negative connotation.

“I can’t imagine a single neighborhood in the country where people will get excited about the term ‘density,’ ” Parolek said. “Even things like ‘multifamily’ can be a scary term that’s past its life span.”

His larger recommendation is for cities to change their zoning ordinances. Parolek advocates for form-based zoning, which allows more flexibility for what can be built on a property.

Another issue is that most housing today caters to families, even though single-person households are now 30 percent of the market and expected to grow.

“Zoning in and of itself is a system that encourages single-family home construction in cities,” Parolek said. “Most cities don’t have effective zoning for missing middle housing, so the easy thing to do is to build a single-family house. There’s no neighborhood pushback and less risk. There’s a reason it’s being done, but it’s not responding to what the market wants.”

He said that where his firm has been able to encourage cities to allow smaller buildings the demand has been strong.

For those building small, demand doesn’t seem to be an issue. Oakwood planned 24 houses in the initial phase of its American Dream project, which have already sold out. It is now building about 140 more, to be completed in late summer or early fall.

Still, developers looking to build smaller face a host of issues beyond simple demand. Many municipal zoning codes require minimum lot or house sizes. Even without these regulations, there can be community backlash when a smaller and denser product is proposed, with complaints including the effects on local traffic and schools, and the fear of lowered property values or the houses becoming rentals.

“The biggest challenge to building smaller housing is municipalities,” said Scott Thorson, chief operating officer of Oakwood Homes. “We hear all the time from city and town management that they want affordable housing, but then they turn around and require large-lot programs.”

Given that smaller houses sell for less, building them at a profit is yet another challenge that developers have struggled to overcome. Thorston said a key is to build on smaller lots. Oakwood’s American Dream development features houses with shared driveways on lots averaging just 2,000 square feet.

What appears to be working in Denver might work in other markets, as well, provided zoning regulations and neighbors approve.

Oakwood’s development comes with no special stipulations, other than that the houses must be owner-occupied for at least three years. Otherwise, homeowners can apply for traditional mortgages and begin building equity, either with the goal of paying off the house or toward using it for the down payment on a larger house a few years later.

In some cases, developers have become more creative to bring prices into reach. In Tacoma, Wash., builders Bill Rehe and Michael Pressnall are creating a development called the Preserve, which is aimed at households making $75,000 per year or less.

Getting the project approved wasn’t easy. They initially approached the Seattle suburb of Gig Harbor and were turned down, before eventually finding a willing partner in Tacoma.

The Preserve will include at least 50 two- and three-bedroom houses of between 950 and 1,250 square feet priced at about $250,000. To make this price point work, however, Rehe and Pressnall’s company, Green Harbor Communities, will continue to own the land underneath the houses, leasing it to buyers for $100 per month on a 99-year leasehold.

“It’s a way for us to remove a barrier of entry to home buyers,” said Pressnall, who estimates that selling the land outright would add another $75,000 or so to the purchase price and keep out potential buyers.

One of the biggest groups to benefit from a downward trend in new housing size are millennials, many of whom are now in their late 20s and early 30s, prime ages for buying a first house. There is some debate about what young people want in a house, or whether coming of age in the aftermath of the housing crisis has soured them on the concept of homeownership.

John Zogby, a public opinion pollster, said his research has found that millennials would prefer to buy smaller houses, if they buy at all, using the excess cash on experiences.

“The whole idea of even owning a home as part of the American Dream for the first time is being challenged,” he said. “There is a greater sense of mobility in modern society. Hence, owning a home, having a mortgage and being fixed in place is not as popular as it once was.”

Paul Habibi, a professor at UCLA’s Ziman Center for Real Estate, disagrees. His experience is that conventional wisdom holds for young buyers.

“People generally want to buy the largest home they can,” he said. “I don’t know too many millennials who would turn away a larger house if they could afford it.”

That’s the case for Reed and Williams. Now that they’re homeowners and beginning to build equity, they plan to move up within a few years, either selling their first home to make a down payment on a larger one, or turning the property into a rental.

“I see this being our starter home,” Reed said. “We’ll build equity and then, hopefully, move somewhere else in the next five to eight years. Eventually, we’d like to get into something a little bit bigger.”