Real Estate: Why Are New Homes So Damn Big?

Do you really want a mansion?Big homes have been in the news lately. On one side we have Viktor Yanukovych, the former Ukrainian president, who managed to acquire a mammoth palace clad almost entirely in marble all while earning $50,000 a year. You have to wonder how Mrs. Yanukovych had time to dust such real estate, maybe the in-laws stopped by to help with the luxury cars and the floating restaurant.

In the states we also have a big house problem: The average home size has continued to rise during the past four years, going from 2,362 square feet in 2009 to 2,679 square feet in 2013, according to the National Association of Home Builders.

Real Estate: The Mansion Mess

The NAHB tells us that between 2005 and 2011 new home production went from 1.28 million units to 306,000 units. That sure seems like a situation where the number of people employed in construction has fallen significantly and industry sales have shrunk.

The median income of new-home buyers has steadily climbed from $91,768 in 2005 to $107,607 in 2011, according to the NAHB. It also says that average prices have increased, going from $248,000 in 2009 to $318,000 in 2013. To give us an apples-to-apples comparison in 2005 the average price of a new home was $297,000 according to the Census Bureau.

Anybody see anything strange about all of this?

First, new homes today are gigantic. The typical home in the 1950s had 983 sq. ft. of space. Today’s new homes are roughly three times larger.

Second, it’s not just that today’s suburban castles are gigantic in terms of square footage, they are also colossal in terms of cubic size. The NAHB says that with new homes today “builders are likely to include are first-floor ceilings at least nine-feet high.” Is that smart? What does it cost to heat and cool such a vast volume of space? How many new home buyers are eight feet tall?

Third, while cavernous new homes are the norm today household sizes are shrinking. According to the Census Bureau, the average household had 3.37 people n 1950 — and 2.54 people in 2013. In other words, in 1950 there were 292 square feet of residential living space per person versus 1,055 square feet in 2013.

Fourth, while home sizes are ballooning incomes are not. The Census Bureau says the median household income was $51,017 in 2012. That’s less than half the income enjoyed by new home buyers in 2011 and 9 percent less than the median household income in 1999.

Fifth, many people get the idea that if you want to reduce real estate costs then it makes sense to buy a smaller home.

Conclusion: You can’t keep selling needlessly bigger and bigger McMansions to people who have less and less income. The proof? New home sales in 2013 were one-fourth the size of new home sales in 2005. Or, look at it this way: The NAHB had revenues of $94.4 million in 2008 while in 2011 revenues fell to $55 million.

Future Real Estate

Builders and buyers need to look ahead. Will future buyers want homes with nine-foot ceilings and vast internal acreage? Will today’s monster houses be easy re-sales or will buyers down the road prefer smaller homes with smaller mortgages, smaller property tax bills and smaller utility bills?

The home building industry is betting that bigger is better, or at least more profitable per unit. It’s a bet that benefits builders who erect elephantine homes, but it’s also a bet which is destroying the home building industry and damaging the economy. After all, if an additional 974,000 homes were sold in 2005 when compared with 2013 there must be a reason. Here’s a hint: It’s not that the population has shrunk or that mortgage rates have hit 12 percent; it is, instead, that huge homes mean high prices and goods with big costs are tough to sell in a fragile economy.

More and more building huge homes no longer resonates with most people. Just ask Viktor Yanukovych.

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