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You've kinda answered your own question: the math doesn't make sense to build small anymore.
Foundation has a cost, and the cost per square foot goes down the larger it is. Same with room sizes, same with the house as a total. A small-ish HVAC unit is nearly as expensive as a larger one, same with water heaters, and houses are going to have one of each regardless.
The most expensive room in a house is the kitchen, and every house has one. Kitchens have water lines, drains, and many additional and more expensive electric lines compared to other rooms in the house; most kitchens also have much more lighting and nowadays a minimum of 2 GFI protected circuits (all on 12 gauge wire). Kitchens also have cabinetry, which can be a huge expense, as well as appliances. Kitchens will likely have tile and more expensive trims.
Following that, the bathrooms are nearly as expensive (though more expensive per square foot) as they have water lines, a drain, a GFI outlet, toilet, sink, and maybe a cabinet, plus accessories (toilet paper holder, towel rack, etc.). Non-powder rooms will have a tub or shower, and likely tile.
But bedrooms and bonus rooms, as well as hallways, foyers, and dining rooms are comparatively cheap. That's why a 5 bedroom house is cheaper than a 4 bedroom house per square foot, all else being equal.
You can think of bedrooms and the others listed as being nearly "blank" rooms compared to kitchens and bathrooms. Adding additional bedrooms is comparatively cheap. Adding in more bathrooms (especially the farther apart they are from the others) is a little more expensive. Adding a 2nd kitchen would be a much greater expense.
The big thing is like back then some people bought these small starter homes and lived in them. At some point it was financially right for builders to build them, and buyers to buy them.
Nowadays there is probably no market for them. Even in the most expensive RE markets, with a tiny lot size, builders will use the same size foundation and build a 1200 sf 2 floor house, instead of a 1 story 600 sf house. Your still running 1 electric box, 1 water hookup, 1 washer/dryer hookup.
Our neighborhood in Central Houston was built in the 1951-1953 timeframe. Most original homes are 2BR 1 bath with some 3BR 1bath houses sprinkled around. About 1/3 of the original houses have been demolished and replaced with larger houses from 2500 to 5,000 sq ft. Our house is a 2/1 on a large lot. We could probably sell it for about $600k and it would be demolished shortly after that.
Here in the SF Bay area, a scraper lot with a worn out house on it is over $1M...
In my Dallas neighborhood, lot price has gone from $100,000 to $500,000 in ten years. These are 7500 SF lots.
There's no way to make money buying a half-million dollar lot and putting a 1500 SF house on it. I'd say the smallest house built in that neighborhood in the last three or four years is probably 4500 SF. Current spec houses are listed from $1.4 to 1.8 million.
And when a small house comes for sale it never even hits the open market most of the time - the sales are just done off market for cash. Same RE agent gets the initial sale of the lot (with house, but not for long) and the subsequent sale of the McMansion. With the commish on the $500k initial transaction and the commish on the subsequent $1.5M transaction in play, why would any RE agent work on sales of $500,000 houses to people who'd occupy it? She'd be writing off 75% of the commish of the dual deal.
So, in existing areas where there's demand, it's all great big houses.
You've got to go way way way out of town to the very cheapest crummiest new subdivisions to find smaller houses being built.
Plenty of 3000sf+ 2bdrm in our retirement community. $700k+
Parade of homes had over 15 models, nearly all were 2bdrm (with 1000+ sf Mstr, due to 3000sf minimum allowed in HOA)
Too much fixed cost in land and basic elements for builders to put up 600sf homes.
A lot of people don't realize this, that the sunk cost for acquisition. site plans, utility access, site prep, impact/excise fees, plus a couple I'm missing are the same for an 800 sg. ft. house as they are for a 3000 sq. ft. McMansion.
Location: East of Seattle since 1992, 615' Elevation, Zone 8b - originally from SF Bay Area
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I actually found one, and they are less than 1/6 the price of new homes here in the Puget Sound region. This is in Moses Lake Washington, a small city of 25,000 in the middle of the state known for high crime, poor schools, and recent new manufacturing plants with the low cost land and cheap power there. All of the new homes I found for sale there are 3-5 bedrooms but there are at least some 2 bedroom options by this builder:
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