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Builders are finding ways to keep home prices in reach despite high interest rates

JUANA SUMMERS, HOST:

Buying a home has gotten a lot more expensive now that mortgage rates have topped 7%. Some people are priced out of the market altogether, and many who already own homes are reluctant to sell. Companies that build houses are exploring new ways to keep prices in reach. NPR's Scott Horsley reports.

SCOTT HORSLEY, BYLINE: The National Association of Realtors said this morning home sales in August were down more than 15% from a year ago. The slump was a little less pronounced in the South, which the realtors chalked up to the region's strong job growth.

TREY LEWIS: We're attracting new residents every day, and they have to live somewhere.

HORSLEY: Trey Lewis is vice president of sales for Ole South, a big independent homebuilder in Tennessee. More than 40% of newly built homes nationwide are now sold to first-time buyers. Lewis says building homes at a price buyers can swing at today's interest rates is a challenge.

LEWIS: It certainly is a math equation. You know, people do have to be able to afford where they live, and we have to build the product to meet that demand.

HORSLEY: These days, that might mean ditching hardwood floors for less expensive laminate or even carpet, using fiberglass in lieu of tile in the bathroom, and doing without those granite countertops in the kitchen. But the biggest way to cut cost is to simply build smaller, which saves on materials and lets builders squeeze more homes on a piece of land. Nationwide, the average size of a new home has shrunk by about 6% over the last two years.

LEWIS: Townhomes are the new entry-level starter home for families. We're doing everything we can to lower the size and the cost of the home and just make it as easy as possible for someone to buy a new home.

HORSLEY: That downsizing trend is a turnaround from two years ago, when mortgage rates were under 3%. Robert Dietz, who's chief economist for the National Association of Home Builders, says, at that point in the pandemic, homebuyers wanted as much square footage as they could get.

ROBERT DIETZ: If you look at, say, the end of 2021, people were looking at Zoom rooms and more home office space. As interest rates have increased, one way to reduce the price of the home is to produce a slightly smaller home where possible.

HORSLEY: Restrictive zoning still makes it hard to build townhomes and other affordable options in many parts of the country. Builder Trey Lewis says that's slowly beginning to change.

LEWIS: It's a process. Growth is not easy, especially in middle Tennessee. The Nashville area has embraced higher density. The outlying areas, where the land's more affordable, has not.

HORSLEY: But shifts in demand may force a change in housing policy. Nationwide, condominium sales were up between July and August even as single-family home sales were down. Nashville realtor Kevin Wilson says he's seen growing interest in townhomes and condos. That's partly for affordability, he says, but also reflects buyers' changing lifestyles.

KEVIN WILSON: They want turnkey - I don't have to do anything when I walk in - and that includes paint. Those buyers, which I would say is the majority, are going to smaller square footage, new construction, townhomes, condos - things that are completely just ease of living, walk right into and not have to worry about maintenance issues.

HORSLEY: Some buyers still want a traditional single-family home, though, with the two-car garage. Wilson recalls one client who looked at a couple of houses like that that needed more work than he could afford. He tried talking the man into a townhome, but his client wasn't interested.

WILSON: He stuck it out and was able to find a single-family home for $350,000. And what he sacrificed in that was square footage. It was a two bedroom, one bath, but it gave him the yard that he was looking for and gave him the location he was looking for.

HORSLEY: Some buyers have decided smaller is better, especially when it comes to their monthly mortgage payment.

Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.