Americans Want Bigger Homes

The pandemic spurred a rush of domestic emigration from big cities, and this shift has continued through mid-2023. After analyzing this development through the lens of the rural-urban continuum, which classifies US counties based on their degree of urbanization and proximity to metro areas, Goldman Sachs Research found that the trend is likely connected to changes in housing preferences.

In a recent research paper led by Goldman Sachs Research analyst Jessica Rindels, she noted that the average square footage of single-family homes sold in 2022 increased by 2% from the 2019 level. This reflects the continuation of a long-standing trend toward buying and building larger single-family homes.

Why Americans are leaving the big cities

A sizeable share of Americans wants bigger homes and space from their neighbors. A recent survey by Pew Research showed more than half (57%) of the respondents preferred to live in a community where the houses were larger and farther apart even though amenities were miles away, over one where houses were smaller but with amenities at closer proximity.

The rise of remote and hybrid work arrangements has made it easier for workers to relocate away from offices that might have otherwise tied them to city centers prior to the pandemic.

Goldman Sachs Research noted the share of US workers working from home at least part of the week peaked at 47% at the height of the pandemic and has now stabilized at around 20-25%, well above the pre-pandemic average of 2-3%.

Leaving the big city for rural counties

While international immigrants continue to follow the historical pattern of settling in mostly large “gateway” cities, domestic migrants have left the largest cities in troves over the last three years, with about half settling for metro counties with populations of 250,000 to one million. Last year 550,000 people left the big cities, compared to 650,000 in 2022, and 750,000 in 2021.

Rindels found that the most urban counties – those in metro areas with a population over 1 million – experienced population growth nearly 1 percentage point below the trend before the pandemic from 2019 to 2023. These includes cities such as Kansas City, KS; New Orleans, LA; and Cleveland, OH.

Conversely, all but the most rural counties saw their populations grow 0.4 percentage points above the pre-pandemic trend on average over the same period, with Americans moving to cities like Ann Arbor, MI; Santa Fe, NM; and Jackson, WY.

Not surprisingly, the migration to smaller counties has driven up housing prices at a faster pace than those in most urban counties when compared to pre-pandemic prices.

Outlook on housing prices this year

Even though many hope that a potential interest rate cut by the Federal Reserve would help lower mortgage rates, Goldman Sachs Research still expects housing prices to stay high this year.

Another issue worth watching is a landmark change coming for realtor commissions. The National Association of Realtors (NAR) agreed on a settlement following homeowners’ class-action lawsuits earlier this year. They agreed to prohibit brokers from offering compensation to buyers’ agents when they list homes to sell on affiliated databases. Instead, buyers would need to negotiate the fee with their agent separately.

The settlement agreement is subject to final court approval, but its mandatory policy changes implementing the settlement practice changes is expected to be effective on August 17th. How this change will impact housing prices remains to be seen.