Shrinking homes and an unanswered question

A glaring question raised by today's A1 Wall Street Journal article about shrinking home sizes was left unanswered.

First, the news:

Over the past three decades, prosperity and a demand for space to accommodate home theaters, offices, gyms and palatial kitchens has pushed up the average size of newly constructed single-family homes by nearly 45% even as the size of the average family has declined. Last year, according to the Census Bureau, the median size of a newly completed single-family home reached 2,248 square feet, up from 1,560 square feet in 1974.

The expansion continued into the first quarter of this year, with the median home size inching up to a near-record 2,302 square feet. But it slipped to 2,241 square feet in the second quarter, and many analysts think a broader decline may be in the offing.

And so, the homebuilders are responding to demand:

"Financing has tightened down so much that many people aren't able to qualify for the larger houses," said Kathryn Boyce, an account executive in Northern California for Boston-based real-estate research firm Hanley Wood Market Intelligence. "Throughout the U.S. people can't afford what they previously did. Floor plans are going to get smaller."

Home sales have plunged over the past year, leaving builders saddled with excess inventory, especially of larger, more expensive homes. In July, new-home sales were running at a seasonally adjusted annual rate of 870,000 units, down sharply from 1.3 million in 2005.

More recently, turmoil in the mortgage market has made it harder for buyers to qualify for bigger loans. As lending standards get stiffer, lenders have cut back on mortgages exceeding $417,000. That's the maximum size loan that lenders can sell to Fannie Mae and Freddie Mac, the government-sponsored financiers that buy mortgages from lenders and repackage them into mortgage bonds for sale to investors.

And so KB, Centex, even high-end Toll Brothers, are scaling down their floor plans.  Here's what the article needed to address but did not: How exactly are the homebuilders pulling this off before unloading their huge inventory of unsold larger homes?  Would it not be more cost-effective to mark down the unsold homes first before building a bunch of new ones?  I'm no expert on the homebuilding business, but neither are most Journal readers, so I can't be the only one wondering.