Builders are shifting their focus to smaller, taller, and off-site homes as a response to high interest rates, financing costs and softer home buying demand, Zillow economist Orphe Divounguy said in a recent blog post.

An analysis of the Census Bureau‘s Survey of Construction 2022 microdata showed that builders started building smaller, attached homes – with more stories and fewer bedrooms — than they had in previous years. They also started a larger share of homes off-site than they had in the past.

Meanwhile, the typical American family size is shrinking and many older Americans will likely be looking to downsize, feeding into the shift to smaller homes. According to Divounguy, the trend looks sticky.  

New construction projects of standalone (or “detached”) homes declined by 12% in 2022 from 2021, while starts of “attached” single-family homes, like condos and townhouses, continued to increase, rising 2.9% over that same span.

Compared to pre-pandemic levels, single-family home starts in 2022 exceeded 2019’s starts by 14.3%. While detached homes make up the large majority of new single-family home construction, this growth from pre-pandemic levels was more concentrated in attached homes. More than 37% more attached single-family homes began construction in 2022 compared to 2019, and detached single-family construction starts increased by just 11% during the same period.

Starts of single-family homes with fewer than three bedrooms increased by 9.5% in 2022 from 2021 while construction on homes with three bedrooms or more fell by 13.1% over that same span. Divounguy attributed this to builders responding to worsening affordability conditions  for potential first-time home buyers.

New homes also got taller but smaller. Single-family homes more than two stories tall saw construction starts increase by 4.9% while starts of single-family homes with two stories or fewer fell by 10.8%. These new homes also shrunk relative to lot size in 2022, reversing a trend that had formed over four years. As costs increased and housing demand dipped in 2022, the size of the median new single-family home fell by 100 square feet (-4.3%), while the median lot size was unchanged. As a result, the ratio of the two measures decreased.

Starts of such off-site homes saw a 23.9% annual increase in 2022 from 2021. Comparatively, more traditional on-site single-family home construction projects saw a 11.2% decline over that same period. Compared to pre-pandemic 2019 levels, off-site starts of single-family home building projects were up 18.8% in 2022, while on-site projects were up 14.0%.