New builds cost 74% more than a decade ago — even as they shrink. What’s behind the rise of ‘housing shrinkflation’ and what it means for buyers

According to Cotality data cited by The Wall Street Journal, the median price for a starter home rose to $287,000 in 2024, up by about 44% from 2020. "Many of the costs don’t necessarily adjust downward just because the home is smaller, such as the price of the lot or the expenses of getting permits," says the report, which added that the income needed to qualify for a mortgage nearly doubled to over $101,000.

What should new buyers expect?

Last year, John Burns Research & Consulting mentioned the “death of the hallway,” noting that instead of shrinking rooms, designers are getting rid of circulation space to cut square footage. “Essentially, we’re Tetris-ing the functional rooms together,” they said. Developers are also using space-saving ideas like pocket offices and multifunctional spaces.

Elyse Sarnecky, marketing director with Marketplace Homes, told Fortune that first-time buyers are prioritizing budget and having a functional floor plan over sheer size. “The actual floor plan of the home is really important as well when considering this. It has to work for their family,” Sarnecky said. “As long as it does, size is less of a factor.”

The National Association of Home Builders echoes this, stating in a press release that over half of millennials (52%) say they’d trade square footage for style, choosing a smaller home with higher-quality products and amenities over a bigger one with bare-bones amenities.

While some buyers may choose smaller homes, others can look to lower-cost areas to suit their budget.

Here’s some tips for homebuyers:

• Expect smaller floor plans: The average size of new single-family homes sold is at the lowest since 2004, and it’s not a trend that may change anytime soon.
• Watch for new build incentives: Builders often offer mortgage rate “buydowns” to entice buyers. In 2023 and 2024, new-home buyers paid about half of a percent lower mortgage rates than existing-home buyers, according to Realtor.com.
• Widen your search: Some areas offer new builds that are cheaper than resale homes, but the gap varies widely by location.
• Check price per square foot: A smaller home might look cheaper at first glance, but the per-square-foot cost may still be steep, so be sure to make sure the finances make sense for your budget.
• Look at alternatives: Townhomes, modular builds, or manufactured housing could deliver more value for your money versus a traditional single-family home.

“Housing shrinkflation” is happening whether we like it or not. The key for buyers is to weigh the trade-offs carefully to make the decision that is right for them.