How Does The Economy Affect House Size?

By James E. McWhinney AAA

Houses seem like they're always getting bigger. This sentiment is confirmed by the U.S. Census Bureau data which tracks the average square feet of floor area in new single-family homes. The data gathered by the bureau shows a trend that generally moves in one direction: up. The exceptions to the trend generally occur in proximity to economic downturns. Figure 1, a comparison of data from the Census Bureau and data from the National Bureau of Economic Research (NBER) highlights the trend and its exceptions. Data from the National Association of Home Builders (NAHB) also demonstrates the demand for bigger homes since World War II, citing the "Profile of a Typical New Home" in 1950 as 1,000 square feet versus 2,265 in the year 2000.


Figure 1: Economic contractions and the size of new homes 1973-2008

According to the NBER, there have been six periods of economic decline since 1973, as shown in Figure 2.

Beginning End
November, 1973 March, 1975
January, 1980 July, 1980
July, 1981 November, 1982
July, 1990 March, 1991
March, 2001 November, 2001
December, 2007 ?
Figure 2: Recessionary period beginning/ending

Each of those periods was associated with a decline in the average square feet, as shown in Figure 3.

Year Square Feet of Decline
1975 50
1980 20
1981 20
1982 10
1991 5
1995 5
2002 4
2008 ?
Figure 3: Years in which the average square feet of floor area in new one-family houses declined

A slight decline in 1995 appears to be an anomaly in the data set, but 1995 (while not an official recession) was a period of modest economic growth and slowing consumer demand, following much more rapid growth in the two prior years. (For an interesting article on historical recessions, read A Review Of Past Recessions.)

Going Big
"A luxury home or luxury real estate is generally defined as a property priced within the top 5-10% of a given real estate market," according to Luxury Portfolio Fine Property Collection, an organization that bills itself as "a collection of the finest and most powerful independent luxury real estate brokers in the world." Despite economic downturns, concerns about energy and criticism about the use of resources, these homes are incredible. The people that can afford to do so are going to buy them. Those that can't will emulate them, as demonstrated by the "McMansion" trend that began in the United States during the 1980s.

This trend brought many of the luxuries previously found only in the custom-built homes of the ultra-rich to wider audience of home buyers. The result was bigger homes, with properties anywhere from 5,000 to 8,000 square feet becoming common. These giant new homes earned their nickname because they are often generic in style, packed in close together on postage stamp-sized lots and built quickly - much like the fast-food delivery style the name suggests. However, the derogatory nickname hasn't hurt their popularity.

McMansions are all about interior space. The rooms are big, the ceilings are high and the "wow" factor is, too. The amenities that convince people to go upscale include lots of windows, spacious foyers, huge staircases, three or four garages, gourmet kitchens, sun rooms, walk-in closets and enormous master bedroom suites complete with whirlpool tubs and separate showers. Walk-in pantries in the kitchen, laundry rooms, media rooms and home offices also make the list. Over-sized garage doors (to accommodate oversized vehicles), gas fireplaces and large decks are also common must-have features.

Not only did the houses get larger, but everything inside them did too. Nine-foot ceilings, four or more bedrooms, and two- and three-zone heating systems have become commonplace. Furnishings have become super-sized too. From professional-grade stoves and refrigerators to overstuffed, oversized sofas, "upscale" and "big" define the trappings needed to fill these mini palaces.

What You Don't Get
The trade-off for a luxurious interior often comes at the expense of the exterior. Cookie-cutter designs, tiny lawns, closely-packed neighbors and garish designs that feature garages nearly as big as the homes (earning the dwellings the nickname "garage mahals") are all common features of the suburban McMansion. Expensive brick or stucco on the front of the house with vinyl siding on the sides and back are signature design features, putting an elegant face toward the street and less costly coverings elsewhere.

On the inside, open floor-plans that often include rarely-used formal living and dining rooms are par for the course. While grand looking, large widows, high ceilings, two-floor great rooms, and huge foyers often result in very inefficient - and expensive - heating and cooling. Furthermore, restrictive community associations often limit the ability to add personal touches to the front lawn.

Why?
What makes people want to buy a big house? Because they can! The rich and famous have always enjoyed lavish estates. From the Hollywood Hills to the Hamptons, those who have money have enjoyed the benefits that come with affluence. While those of lesser means may not be able to drop a few million bucks for a giant ranch in Montana or a gated community in Miami, they are surrounded by images of affluence in the media. From the palaces featured in video games and movies to the celebrity house tours on many popular cable television shows, everybody can see how the rich among us live. Add in years of record-low interest rates and aggressive marketing of upscale homes by residential builders, and the stage is set for the Joneses - and everybody else - to get their piece of the pie. (To learn more about how interest affects housing, see How Will Your Mortgage Rate? and Understanding the Mortgage Payment Structure.)

Backlash
From Austin to Atlanta, angry neighbors, zoning boards and politicians have been fighting back against the "Hummer homes" that are cropping up in established neighborhoods when the wealthy crowd moves. Starter homes and small ranchers are often demolished and replaced by faux estates on quarter-acre lots as affluent people move closer to the city but don't want to live in the smaller, older houses often found within city limits. To critics, these new homes look out of place compared to the rest of the neighborhood and clash with the existing architectural styles of the other properties.

If You Go Big
Almost everybody loves a big house, but not everybody can afford to buy one. While economic downturns underscore this reality, those who can afford luxury have always been attracted to it and, if history offers any indication of the future, beautiful homes in ideal locations are always going to attract buyers. (Downsize Your Home To Downsize Expenses provides a look at the other side of the coin, highlighting strategies for those that can no longer afford or don't wish to own a big house.)

Since a home is likely to be the most expensive item you will ever purchase. If you are contemplating the move to a larger home, learn to pay attention to the details. It starts with choosing the right location. Purchasing a property in a neighborhood with homes of similar size and style will not only help you avoid antagonizing your neighbors, it will also make the property more attractive for resale. (To find out how big you want to go, see Mortgages: How Much Can You Afford?)

Likewise, choosing a property that has some land around it goes a long way toward making the house look like it belongs where it sits. Even communities that are seeking to limit or ban the construction of big homes don't tend to have a problem when a builder puts a large home on an equally large plot of land.

Just as the size of the lot plays in to the aesthetics of the purchase, so does the placement of the garage. Side-entry garages minimize the impact of having three or four garage bays side by side, toning down the "garage mahal" look. If side entry is not an option, consider a recessed garage design. Having a huge garage that sticks out in front of the house is simply not as attractive as a more understated look - for your neighbors or future buyers.

Conclusion
If you are building a new home, you should consider energy-efficient building practices and designs for new construction. The right heating and cooling systems, lighting, windows and insulation can make a big difference in the long-term cost of owning the home. You'll also want to pay attention to the quality of the materials used to build the house. To save a few dollars, many big houses use top-quality material on the front and lower quality material elsewhere. A beautiful brick or stucco facade faces the street, but vinyl siding is used for the sides and back. It's often worthwhile to spend the extra money to make the house look complete. (For more information on buying a home in a recession, check out 7 Tips On Buying A Home In A Down Market.)

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