In the future – when home builders start building new projects again – the size of those homes will shrink. While the cost of building those homes will continue to rise significantly, a smaller house still will cost less.

This change is historic. After a 50-year run-up in the size of homes and lots, the trend is to small. Rather than being gradual, lot and home size will decline precipitously in the coming years. The reasons are several and compelling:

• The cost of land will rise because it is scarce, especially in the suburbs. This is forcing new construction into the existing communities where it is more expensive. This expense will require more density which will inevitably mean more and smaller units.
  
  
• Buildable parcels will be smaller, and projects will be smaller. As easily developable properties are exhausted, “infill” will fill the need. Land assembly and entitlement will be much more complicated and risky. The long time frames associated with urban development also bring higher costs of capital (carrying costs). The former economies of scale associated with master-plan communities are history, and fees for services will climb. All will be added to the costs of building.
  
  
• Demand demographics are changing, suggesting an overall decrease in household size. Three population “cohorts” are generally at play in the housing future of America. These include the 78 million “baby boomers” presently aged 44 to 61; 82 million Gen Y’s (often called millenniums), the children of the boomers who are in the teens and 20-something years; and the much smaller (35 million) Gen Xers mostly in their 30’s. The boomers are past their child bearing, household expansion years, while the Gen Yers haven’t entered those years. The boomers will downsize, while the youngsters start out downsized.

Now, a caveat: if you have a big house, fear not. It is unlikely big homes will become pink elephants. This region will continue to attract a broad, international, comparatively wealthy consumer. Our strong and diversified economy, culture, great weather and tourism levels combine to suggest that the San Diego market will remain attractive.

No Equity/No Cash

Gen Ys also lack the money for a big house. Their travels up the housing ladder are just beginning. However, housing design will get better and will acclimate to the needs: a well-designed, efficient smaller unit is perfectly fine for most households.

Even when we get to the point where Gen Yers start to raise families, aggressively moving up the housing ladder will be too expensive for many. The alternative is to raise the family in a multiplex project, be it mid- or high-rise, just as is customary in big cities like New York and Chicago, and all over Europe.

Psychology and acceptance will aid the trend. The London boys (a family of five) were raised in the 1950s and ‘60s in a 1,600-square-foot single-family home in the suburbs. We never experienced any deficiencies. The fact that a similar family might have been accommodated in more contemporary times in a 2,500- to 3,000-square-foot home is more a matter of sociological norms than it is necessity.

Housing Prices Will Increase

The delivery cost, when measured per square foot, will increase. The factors of production are all becoming more costly. This includes construction costs, labor and land. While the pace of those increases has slowed during the last two years (from double to single digit percent increases), they have mostly not gone down, nor will they. We participate in a global market, and demand for the materials of construction remains high.

Because unit size will shrink when homes are built in the coming years, they are likely to cost less. A 1,400-square-foot home is cheaper than a 2,000-square-foot home.

This is not a commentary on the current cycle. The residential market slowdown will play out. The next year may see an overall decrease of another 10 percent of sales value. Eventually, existing home pricing inevitably will rise with a recovering market.

But the new homes that will be delivered in the coming years will mostly be condominiums and apartments that are stacked in much denser proportions to the site, and designed smaller to match the emerging demographics and demand of the major market segments.

Gary H. London is president of The London Group Realty Advisors Inc., providing real estate consulting and economic analysis. Check him out on the Web at www.londongroup.com or e-mail him at glondon@sandiegometro.com.