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High borrowing costs and affordability challenges continue to make the road to homeownership bumpy for many Americans.
The newly released State of the Nation’s Housing 2025 report from Harvard University’s Joint Center for Housing Studies found that homebuilders are responding to these impediments by building smaller homes.
Yes, starter homes are shrinking.
The report found that “the median size of a new single-family home declined for the third straight year in 2024, down to 2,150 square feet.” That’s down from nearly 2,500 square feet in 2013 and alarmingly close to the roughly 2,100-square-foot average seen in 2009, during the worst of times of the global financial crisis.
“Homebuilders are able to make adjustments to meet demand where it is, and what it’s showing is that there’s demand for lower-cost units,” Daniel McCue, a senior research associate at the Joint Center for Housing Studies, told Fast Company. “Buyers look like they’re willing to buy slightly smaller homes to be able to afford them, given that prices have risen so high over the past three, four, five years, and interest rates remain relatively high as well.”
Melanie French, CEO of a Dallas‑based, fully integrated property management company RR Living, echoed the sentiment, saying that these cost increases are reshaping the American dream of homeownership, prompting builders to respond by reducing the size of new and starter homes.
“Builders are prioritizing density by shifting toward townhomes and build-to-rent communities to meet the demand for entry-level housing, especially in the Northeast and Western states with recognized higher living costs, such as California and Massachusetts,” she added.
As for buyers, with housing getting less affordable, they are increasingly looking for ways to save money on a home purchase, says Realtor.com® senior economic research analyst Hannah Jones.
“Home shoppers are finding creative ways to achieve homeownership, including buying smaller homes and combining forces with family and opting for multigenerational living. Though these circumstances may call for different home types, the main motivation is affordability,” she adds.
This shift in both consumer expectations and builder strategies could reshape what “starter home” means in 2025 and beyond.
What Harvard’s housing report says about the shrinking starter home
The Harvard Joint Center for Housing Studies 2025 report outlined several drivers for this phenomenon:
Cost burdens
First, cost burdens make smaller homes the only feasible option for an increasing chunk of buyers.
Cost-burdened homeowners are households “with monthly housing costs exceeding 30% of monthly income,” according to the U.S. Department of Housing and Urban Development.
Harvard’s report found that these homeowners rose by 646,000, to 20.3 million, representing a whopping 24% of all homeowner households in 2023. The report added that one factor in this jump was the huge increases in both insurance premiums and property taxes.
The outlook
As the report noted, the outlook for the housing market is connected to broader economic and policy factors.
“As such, much of its future is uncertain,” it added.
For instance, tariffs are now another driver of costs in both homebuying and homebuilding. Builders anticipate that these will add a $10,900 price tag to already elevated new-home prices.
Of course, interest rates are also a major driving force. As of June 26, the average 30-year mortgage rate stood at 6.77%, according to Freddie Mac. To put this in perspective, for the corresponding week (June 24) in 2021, it stood at 3.02%, Freddie Mac data shows.
“Stuck in a bit of a rut, the housing market continues to suffer from high home prices and elevated mortgage rates. As a result, nearly every large U.S. metro is unaffordable to median-earning households,” says Jones.
Stimulating supply
Harvard’s report also noted that there is still an enormous supply shortage despite jumps in housing construction.
Several obstacles remain to be overcome to encourage builders to reintroduce modest-sized homes. June’s National Association of Home Builders sentiment survey reflected this, finding that sentiment was at its third-lowest reading since 2012.
Harvard’s report found that elevated interest rates, inflation, the cost of land, and regulatory barriers are also contributing factors.
The report noted that the shortage of construction workers is also a factor for residential developers.
“We’re witnessing the compression of the American dream, especially in gateway markets where the concept of a ‘starter home’ has become financially out of reach,” says Salim Chraibi, CEO at residential developer Bluenest Development.
In turn, he says that builders are being forced to reimagine what entry-level housing looks like, often opting for townhomes, micro units, or dense infill developments that prioritize efficiency over square footage.
“The average cost burden has shifted so dramatically that size is no longer the baseline metric; it’s about whether a young family can afford to live within 50 miles of their workplace,” he adds.
What today’s starter home costs—and how size plays into the price
Because of all the driving forces making homeownership increasingly costly, the meaning of a starter home has dramatically changed. Starter homes typically refer to the first home that homebuyers can afford, until they can buy something bigger or pricier.
Alexei Morgado, a Florida real estate agent and CEO and founder of Lexawise Real Estate Exam Preparation, says that this translates into homebuyers considering open floor plans, efficient kitchens, and flex rooms instead of three bedrooms and a backyard.
“It is less about size and more about how the space feels and functions, especially as first-time buyers expect low-maintenance properties for their first home, and modern finishes for their investment. This has changed how first-time buyers think about the space they want in their homes without going over their budget,” he adds.
Realtor.com reported an eye-popping 28 states “with at least one city where the median price for a starter home (defined as priced at or below 80% of the geography’s median) is $1 million or more.”
In states such as California and Massachusetts, starter homes are now priced close to or above $1 million, despite offering smaller square footage. The Golden State, for instance, has 77 cities where a starter home will cost you at least $1 million.
“In our work across Florida, we see regional contrasts playing out in real time,” says Chraibi.
He adds that markets in the Southeast and parts of the Midwest still offer relatively more space for the money. Still, that advantage is narrowing as material costs, zoning constraints, and land scarcity push even modest builds into the unaffordable category.
“The outlook depends heavily on policy interventions and partnerships. Developers alone can’t solve the problem. We need expedited permitting, subsidies, and new financing tools to bring back the true starter home,” he says.
The numbers speak for themselves. For instance, in May 2025, the median home list price in Rancho Santa Fe, CA, was $6 million, and the median home list price per square foot was $1,000, according to Realtor.com data.
On the other hand, the median home price in Brookline, PA, was $465,000 in May.
In addition, Andrew Fortune, a Realtor® and founder of Great Colorado Homes, says that in Colorado Springs, most starter homes now cost between $370,000 and $400,000. This price will get you about 1,200 to 1,400 square feet, which is smaller than what buyers got 10 years ago.
“The price per square foot keeps climbing, so buyers are settling for less space. You might get three bedrooms, but the yard is tiny or even nonexistent,” he adds.
If you want more house for your dollar, the Midwest and parts of the South are your best bet, he says, noting that metros such as Kansas City or Indianapolis still offer decent-sized homes for less money.
“In Colorado Springs, you get more space than in California, but not as much as you did five years ago,” he adds.