The American dream has shrunk.

Buyers looking for new, lower-priced homes will find themselves in the outer reaches of the suburbs looking at houses that are six feet narrower than five years ago and are largely bereft of basements, garages, family rooms, patios, balconies, double ovens, frost-free refrigerators,fireplaces, a second full bath and even third bedrooms.

Because of high mortgage interest rates and shrinking family sizes, builders, who just a few years ago were constructing relatively traditional, spacious, brick suburban houses on roomy lots have turned instead to building scaled-down, "no-frills" townhouses and detached houses.

Constructed with numerous windows, mirrors and other devices to make the houses seem larger than they are, these scaled-down residences are selling well and are a large part of the new-home market, particularly in the areas around Manassas, Germantown, Gaithersburg and Laurel.

As the rest of the housing market collapsed last year, sales of these smaller, lower-priced houses started to surge because they were more affordable and attracted the first-time home buyers who were not burdened with trying to sell an existing house in a poor market.

With existing homeowners having trouble selling their houses, these first-time buyers became the largest group of buyers for new houses. But because they had no equity buildup from previous residences, they usually needed the most economical houses on the market.

Approximately 50 percent of the houses sold in the Washington area last year cost less than $90,000, according to real estate experts.

"People are willing to do with less to get a roof over their head," said Tom Stevens, who is in charge of Virginia new-house sales for Shannon and Luchs. "People have accepted that they are not getting the frills they used to get. The whole reason builders have eliminated features is to get the homes basic and more affordable to the general public."

The three-bedroom, colonial-style house on a half-acre or quarter-acre lot that was $84,000 in 1978 was $115,000 three years later, according to Val Hawkins of the Montclair development in Prince William County. Those prices, coupled with high interest rates, put them out of reach of most of the buying public. That meant that prices had to come down.

With construction costs fixed and land prices also rising, the logical place to cut the cost of a house was in the size of the house and the "extras" that came with it.

During the housing recession in 1973 some builders experimented with no-frill houses, but the houses did not sell because they were too basic and too boxy in appearance.

This time, builders are trying to mask the smaller houses behind Victorian or colonial styles, because the builders have found that people will buy small only if the house looks stylish.

Builders also are adding features thet make the houses appear larger. There are more cathedral ceilings in living rooms. There are fewer rooms, but they are separated by a step or two. Windows are larger and more numerous. One large first-floor room now serves as living room, dining room, den and family room, said Steven Moore, of the National Association of Homebuilders. And, in most model units, the doors are removed and sometimes mirrors are added to give a feeling of more space.

Old-fashioned wooden porches are making comebacks as a touch of the Victorian and as devices that give the appearance of more space and distinctiveness.

The sparing use of extras also reduced prices.

"There are a trememdous number of options being offered with the smaller houses," said John Neill, president of Fairfield Homes. "If you build in all the options, you preclude people from the market."

According to the National Association of Homebuilders, 33 percent of the houses built in 1981 had full or partial basements, compared to 42 percent in 1978. Houses with garages or carports were down 7 percent to 75 percent. Houses with two or more bathrooms were down from 73 to 70 percent and houses with 1,600 square feet or more had declined from 54 to 47 percent.

Builders in the Washington area have followed the trend.

The savings can be substantial. The principal and interest payments on a $100,000 mortgage at 13.5 percent for 30 years are $1,145 a month. Those payments can be reduced to $801 a month by buying a house with a $70,000 mortgage. That is a saving of $4,128 a year.

In Montgomery Village, Kettler Bros. recently finished selling 200 of their "Picton" models, priced from $49,950 to $54,950, that had only two bedrooms and one full bath. Some of the homes came with roughed-in powder rooms and utility rooms on the first floor, and unfinished third floors. The first floor featured just two rooms: a small kitchen and a living/dining room.

"When mortgage money goes up there is a reduction in the things you can put in a house," said Samuel W. Barrow Jr., a vice-president in charge of residential sales for Kettler.

Yeonas, once one of this area's most widely known builders of large custom homes, now builds smaller houses with price tags of just above $60,000. Ryland Homes, which always has aimed for the first-time buyer with individual houses, is building small townhouses.

Hawkins, the overseer of Montclair, a new, 1,564-acre community in Prince William County, said that he had called in his builders two years ago and told them to start building smaller homes.

"What we were trying to do was to come up with an affordable house," Hawkins said. "We knew there was a trememdous demand for the smaller affordable house, because that was the only way the first- and second-home buyer could afford a house."