Video: Housing starts hit 17-year low

updated 10/17/2008 1:52:19 PM ET 2008-10-17T17:52:19

When the U.S. housing market hit the skids, homebuilders like KB Home that thrived by offering large homes and expensive amenities began to rethink their home designs with an eye toward making smaller, less costly homes.

Three years into the downturn, that trend appears to be intensifying, as many builders scramble to make their wares palatable and affordable to first-time buyers and compete with a trove of preowned homes and deeply discounted foreclosed homes on the market.

Los Angeles-based KB, which builds homes to order, began downsizing some of its floor plans last year.

"That worked for a time, but the market continued to move away from us," Chief Executive Jeffrey Mezger said recently.

The company initially pared down 3,400 square-foot homes that sold for around $450,000 to smaller, 2,400 square-foot homes selling for around $300,000.

Now, the builder is shrinking floor plans again. It recently launched a new line of homes in foreclosure-ravaged Southern California that start at 1,230 square feet and are priced a little over $200,000.

Other builders, including Warmington Homes and John Laing Homes, have taken similar steps, as the industry seeks to stem losses due to falling home prices, tighter mortgage lending standards and skittish buyers. New home sales fell in August to the slowest pace in 17 years, while the median sale price fell 5.5 percent to $221,900.

The trend in smaller homes is a reversal of more than two decades of expanding floorplans, during which median size single-family went from less than 1,600 square feet to more than 2,200 square feet.

That steady drive by builders to erect increasingly bigger homes peaked during the housing boom. Derided by some as McMansions, these super-sized homes packed with amenities helped drive up home prices even more.

Beyond competing with preowned homes on the market, declining home prices have also made it less profitable to build large homes, said Nishu Sood, a Deutsche Bank analyst.

"The only way to respond to the lower price environment ... is to make the home smaller," Sood said. "As you kind of reduce the floor plan size, we're getting back to more the way things were historically, kind of undoing the excesses, not just from a price perspective but home size and (fewer amenities)."

Major Market Indices

KB Home began to rollout its most recent iteration of smaller homes earlier this summer in Beaumont, Calif., as part of a development dubbed Highland Vista.

The homes are 1,230 square-feet and have three to five bedrooms.

Previous KB Home developments in the Beaumont area were built with homes in the 3,000 square-foot range.

"We really looked at what can the first-time buyer afford based on the median income for those markets and that's kind of how we designed our house to meet that price point that would attract those buyers," said Steve Ruffner, president of KB Home's Southern California Coastal Division.

The company plans to roll out more of these smaller floor plans nationwide beginning next year.

The homes, while smaller, feature large open spaces, a so-called great room often linking the living room and dining room area that might have previously been walled off. The homes also have a two-car garage standard and storage space.

"The square footage isn't the focus, it's really the utility and efficiency and flexibility of the home that is our focus," Ruffner said. "You could have a three-bedroom, 2,500 square-foot single-story home and all you had was wide hallways and bigger rooms. It wasn't really giving (buyers) the utility."

"The trend definitely is going to be, I think, getting back to the basics: What people can afford is the type of home they're going to buy."

That's the driving thought behind Warmington Homes' Summer Park Estates development in Galt, Calif.

Warmington primarily caters to the move-up homebuyer, but does focus on the entry-level market in Las Vegas. At Summer Park, the company is building out the third phase of the development with homes that are markedly smaller than previous phases.

The older homes averaged 3,500 square-feet and typically sold in the mid to high $500,000 range. In contrast, the newer homes average 2,200 square-feet and will be priced in the low $300,000 range.

"We will continue to build smaller houses and that's a function of price, because financing is more difficult to get today," said Allen Morris, senior vice president of sales and marketing for Warmington Homes, which is based in Costa Mesa, Calif.

Homebuyers' tastes, possibly influenced by tighter mortgage lending, are also helping drive the changing trends in new homes.

Big formal entries, high ceilings and lavish light fixtures are also not as high a priority among many buyers these days, said Linda Mamet, vice president of sales and marketing for Irvine, Calif.-based John Laing Homes.

Morris said fewer buyers are opting to upgrade from a standard laminate kitchen countertop to a granite countertop.

The builder also has downgraded the level of amenities and finishes built into its showcase homes, to reflect the base price of homes.

"With move-up buyers, for a long time everybody wanted the biggest house on the biggest lot with the best view and all of the options," Morris said. "What we're doing is we're building homes today that have a lot fewer options."

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