The Economics of Home Size: Is Bigger Always Better?

There is one common belief in the land of the free when it comes to house ownership: bigger is always better. A sprawling house with a number of bedrooms, a backyard, and plenty of square footage has conventionally been considered one of the key symbols of success, comfort, and wealth in the United States. The appeal of larger homes still holds its place in the U.S. real estate market, and buyers choose more space over affordability. But beyond that obvious lifestyle appeal, there's another economic principle kicking in that's lesser known: economies of scale.

This economic term refers to the ability of businesses to decrease their costs by increasing production quantities. In real estate, this is a major determining factor as far as why larger homes often seem like a better deal. For economic reasons, the more square footage that can be built by a homebuilder means a lesser cost per square foot for both the builder and the buyer. Which begs the question: does this financial efficiency ultimately make bigger homes the best option? Or are there downsides to these larger homes that would make smaller ones more desirable in certain situations? Let’s discuss the economics of home size and pose the question: is bigger house better?

The Cultural and Market Preference for Large Homes

The size of American homes has drastically increased in the last hundred years. The average new home in the 1950s was approximately 1,000 square feet and was an adequate size for the typical nuclear family after World War II. However, as the economy expanded and metropolitan sprawl began, home sizes started increasing on a regular basis. By the early 2000s, the size of homes more than doubled and surpassed average sizes of 2,500 square feet. This expansion wasn't driven purely by need but by evolving cultural values and economic conditions that prioritized bigger spaces and the lifestyle they symbolized. In American society, a spacious house with multiple bedrooms, expanded kitchens, and outdoor amenities signals wealth, comfort, and the "American Dream." 

Is bigger house better? Well, the preference for large homes has strong economic reasoning behind it. Larger houses have more value for the dollar to many individuals. While the initial investment is much higher, generally the square foot price is lower, which seems like a smart investment. People see larger homes as a better investment due to their long-term value and resale value, plus they have room to accommodate a growing family or changing needs.

Economies of Scale: The Hidden Driver

Economies of scale refer to cost advantages that businesses realize with increased production and, consequently, spreading their fixed costs over more units of output. In homebuilding, this concept plays a crucial role. The bigger the square footage of the home, the cheaper it is per square foot both for the builder and for the buyer to buy. Larger houses are inclined to consume more materials and labor, but the total cost is compensated by the efficiency of scaling up the production. The builder can optimize the use of his resources, while the buyer gets more living area with less price per square foot.

A recent article by the National Association of Home Builders (NAHB) looked at the economies of scale in home construction. It reported clear evidence that the bigger the home, the lower the per-square-foot cost. According to the findings, median prices have dramatically fallen from about $200 per square foot for homes under 1,200 square feet to an average of $132 per square foot for those large homes over 5,000 square feet.

As NAHB’s Paul Emrath highlighted, “The cost per square foot of a [new] single-family home declines systematically as the home becomes larger… In microeconomics, unit costs that decline as a business operation increases in size are called economies of scale.” Emrath’s findings reinforce the idea that bigger homes are not only more affordable per square foot for buyers but also more efficient for builders to construct.

For homebuilders, economies of scale translate into higher margins and profits. Larger homes allow a builder to spread fixed costs in design, materials, and labor out over a larger space, reducing the cost per square foot. More important, though, it allows the builder to maximize the return on larger homes even while offering those homes at relatively competitive prices. Whether building in larger subdivisions or working on custom projects, builders can benefit by scaling up construction.

Larger homes also tend to appreciate at a slower rate compared to smaller homes, thus providing a higher return to the money invested in them. This often tends to be perceived as an economic benefit which makes buyers lean toward bigger properties, even if it just means stretching budgets just to afford the upfront costs. The combination of affordability per square foot and long-term investment potential makes large homes particularly appealing to many.

But What Are the Hidden Costs of Larger Homes?

Whereas the appeal of larger homes is usually linked with perceived value and lower cost per square foot, this is a distinction that comes with many hidden expenses piling up fast.

Higher Upfront Costs

While the price per square foot may be lower for larger homes, it can still be very expensive overall. A home that includes 5,000 square feet may have a lesser price per square foot compared to a home that is much smaller, but the cost will remain much greater due to the size alone. This could put larger homes out of reach for more budget-conscious buyers, especially when growing interest rates and mortgage payments are factored into the equation. 

Maintenance and Utility Costs

Larger homes usually mean more significant sets of responsibilities, especially towards maintenance and utilities. Heating and cooling a big home may get very expensive, as energy bills skyrocket during extreme seasons. At the same time, standard maintenance, cleaning, and corrections become more costly, the larger the home is.

Insurance Premiums

As homes grow in size and cost, so do the premiums to insure them. That, at least, is especially true as growing risks - climate change, inflation in housing markets - push up premiums. In California, for instance, Allstate will increase home insurance rates 34.1% in its most recent filing, affecting hundreds of thousands of homeowners. This is partly a function of climate risk, such as wildfires, but also with construction inflation, where the cost to rebuild or repair one's home has gone up 40% since 2019.  

Environmental Impact

Larger homes also come with a greater environmental cost. They use more energy for heating, cooling, and lighting, translating into a larger carbon footprint. The construction of bigger homes requires the use of more building materials and contributes to resource consumption and environmental degradation.

Smaller Homes: Are They Making a Comeback?

Smaller houses have carved a niche for themselves in recent years, with the concepts of tiny homes and ADUs (accessory dwelling units) gaining steam as being more affordable and sustainable options to conventional housing. It is the lure of living simply, enjoying a low cost of living, and leaving a smaller carbon footprint that's driving this desire for compact living spaces. Smaller options increasingly represent practical solutions for younger generations, retirees, and second-income opportunities in an attempt to combat the current housing crisis.

The tiny houses are typically defined as less than 400 square feet, and ADU's are self-contained housing units added onto an already existing home lot. Financial flexibility with reduced utility costs and lower property taxes is one perfect reason for humans to downsize or save on housing expenses. Yet the road to mainstreaming of tiny homes and ADUs is littered with several obstacles despite this growing popularity. The prevailing zoning laws across many cities tend toward bias towards bigger single-family houses. Approvals for small units can be quite hard to come by. Minimum size requirements, restrictions on where the ADUs can be built, and limitations on how many units per lot remain serious barriers.

The Middle Ground: Optimal Home Size for Cost and Comfort

In debates ranging between large and small homes, a growing number of homeowners are turning toward the middle ground that strikes a balance among cost, comfort, and sustainability. The concept of "optimal home size" epitomizes an emerging trend where consumers look for homes big enough to meet their needs for accommodation without being so big that they would be financially or environmentally burdensome.

The key to finding the perfect home size is in the balance between space and utility. Generally speaking, homes within the 1,500- to 2,500-square-foot range hit the sweet balance, wherein one finds enough space for a family to comfortably live without excessive costs or wasted square footage. These homes can allow flexibility in room use, adequate storage, and space for entertainment or work without inflating utility bills or requiring excessive maintenance. Market data certainly point to a decided trend toward medium-sized homes, now referred to as "right-sized," offering the advantages of cost efficiency without sacrificing functionality.

Final Word

The economics of home size work out such that larger homes have much lower costs per square foot, but they also incorporate a number of hidden expenses that can wipe away these initial savings. Their smaller counterparts may seem financially prudent but often also have inefficiencies due to the lack of economies of scale. 

This trend toward medium-size homes reflects a change in priorities for consumers who balance affordability with sustainable living space. So, is bigger house better? The housing market has definitely evolved to the point where finding the right size for a home is increasingly about finding the right balance between cost, comfort, and long-term value.