Smaller Homes Present Greater Investment Opportunities Than Larger Homes

A recent analysis of home listing prices has found that smaller homes tend to increase in price at a faster rate than larger homes. On the other hand, there are other factors to consider when thinking about making an investment in a home, including the overall dollar amount that might be obtained from selling a larger home versus a smaller home.

Small Homes Offer Greater Rate of Return

According to an analysis conducted by Nerdwallet, 17 out of 20 metro areas studied enjoyed a higher rate of return on smaller homes. In fact, the smallert 25 percent of homes grew by 8.9 percent during the period that spanned from 2013 to 2016. The second-largest quarter of homes, on the other hand, had the second-largest percent increase in prices at a rate of 7.4 percent during this same time period.

Understanding the Allure of Smaller Homes

The reason for the greater rate of return on the price of smaller homes versus larger homes is not entirely clear. One possibility is that the demand for homes in the city is on the rise and, in turn, homes in the city tend to be smaller than those that are outside of the city. Therefore, the fact that small home prices are on the rise may be more of a reflection of the rising prices of homes located in the city. Urban areas are also experiencing housing shortages, particularly when looking at starter home inventory, which also has an upward effect on the price of smaller homes. New construction has also been down throughout the country since 2007, which means that inventory is generally low. In addition, many people who purchased a starter home between the years of 2004 and 2006 have not recovered all of the value that they lost in their homes during the housing crisis. This means they haven’t built up the equity that people would typically use for a down payment in order to move up to a larger sized home.

Fast Rates Versus Greater Return

While smaller homes may increase in value in terms of percentage gains, larger homes are still appreciating at greater rates in terms of dollar amounts. Smaller homes, for example, were found to increase in value by an average of $57,535 over the last three years. Larger homes, on the other hand, appreciated by $99,790 during this same time period. This is because larger homes are generally more expensive than smaller homes to begin with. Therefore, even a smaller percentage increase still results in a larger monetary increase in a larger home.

Examining the Boston Market

So, what is a “small” home? In terms of the Boston housing market, NerdWallet analyzed data collected by Realtor.com and found that the smallest 25 percent of homes are up to 1,610 square feet in size. The midsmall category, which comprises the next 25 percent of homes, ranges in size from 1,610 to 2,261 square feet. The midlarge category ranges in size from 2,261 to 3,278 square feet while large homes are those that are more than 3,278 square feet in size.

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