Average New Home Size Keeps Getting Bigger

The average U.S. new home built in 2005 reached a record 2412 square feet according to the National Association of Home Builders. I grew up in San Diego California with my Mom and Dad and one brother in a 900 square foot home. It was a 3 bedroom, 1.5 bath home. We had 1 shower in the hall bath (the master bath had just a sink and commode). We lived there until I was 19 and my brother 16, so it wasn’t just a growing family living in this size space, it was a married couple with two 6 foot tall sons.

The thing is, I don’t recall ever thinking as I grew up that we lived in a “small” home. Maybe that’s because I never knew anything different. All my friends lived in homes the same size (some with the identical floorplan). I called my Mom to check this out with her and asked “was the house in San Diego big enough?” She said, “it was perfect”. She too admits never thinking we needed more space.

But the thought of squeezing my own family of 4 into a 900 square foot home seems unthinkable to me today. Most of the buyers we work with want a home at least 2000 square feet in size. Even the average rental home is about 1800 square feet in size. What has happened to Americans that causes the need for this much space? There doesn’t seem to be a definitive answer, but I did find a good article from the Wall Street Journal, which I’ll share below. It seems Americans just love to Supersize everything we can.

From the Wall Street Journal July 2005
Home as Hummers
We Americans seem to be in the process of becoming wildly overhoused. Since 1970 the size of the average home has increased 55 percent (to 2,330 square feet [2004]), while the size of the average family has decreased 13 percent. Especially among the upper crust, homes have more space and fewer people. We now have rooms specialized by appliances (home computers, entertainment systems and exercise equipment) and — who knows? — may soon reserve them for pets. The long-term consequences of this housing extravaganza are unclear, but they may include the overuse of energy and, ironically, a drain on homeowners’ wealth.

By and large, the new American home is a residential SUV. It’s big, gadget-loaded and slightly gaudy. In 2001 about one in eight homes exceeded 3,500 square feet, which was more than triple the average new home in 1950 (983 square feet). We have gone beyond shelter and comfort. A home is now a lifestyle. Buyers want spiral staircases and vaulted ceilings. In one marketing survey by the National Association of Home Builders, 36 percent of buyers under age 35 rated having a “home theater” as important or very important.

Of course, homeownership (now a record 69 percent) symbolizes success in America. The impulse to announce more success by having more home seems to span all classes. In his book “Luxury Fever,” Cornell University economist Robert Frank noted that Microsoft co-founder Paul Allen built a 74,000-square-foot house. According to Frank, that roughly equaled the size of Cornell’s entire business school, with a staff of 100. Frank sees a “cascading effect” of imitation all along the social spectrum. The super-wealthy influence the wealthy, who influence the upper middle class — and so on. People constantly enlarge their notion of “what kind of a house does a person like me live in.”

Another cause of this relentless upsizing is that the government unwisely promotes it. In 2005, about 80 percent of the estimated $200 billion of federal housing subsidies consists of tax breaks (mainly deductions for mortgage interest payments and preferential treatment for profits on home sales), reports an Urban Institute study. These tax breaks go heavily to upscale Americans, who are thereby encouraged to buy bigger homes. Federal housing benefits average $8,268 for those with incomes between $200,000 and $500,000, estimates the study; by contrast, they’re only $365 for those with incomes of $40,000 to $50,000. It’s nutty for government to subsidize bigger homes for the well-to-do.

But otherwise, why shouldn’t Americans buy what they can afford? No good reason. The trouble is that freedom doesn’t confer infallibility. With hindsight, some homeowners may regret sinking so much money into ever-grander houses. One possible problem is future operating costs. Homes exceeding 3,500 square feet use about 40 percent more energy than those between 2,000 and 2,500 square feet, says the Energy Information Administration. Suppose electricity or natural gas prices rise because (for example) new power plants or terminals for liquefied natural gas aren’t approved.

A harder question is whether bigger homes might lose value. Say what? Gosh, we’re in the midst of the greatest real estate boom in U.S. history. Since 2000 home values have risen 55 percent, to nearly $18 trillion, says the Federal Reserve. Americans have borrowed and spent lavishly against rising housing prices. That has kept the U.S. and world economies advancing. Americans increasingly believe that they can’t lose by investing more in their homes: They can enjoy themselves and make a pile.

But booms have a habit of imploding. The latest evidence that cheap credit and speculation have artificially inflated home prices comes from a study by the investment bank Credit Suisse First Boston. It finds that home buying is increasingly driven by purchases of investment properties and vacation homes. In 2004 these buyers accounted for 14.5 percent of all home sales, up from an average of 7.5 percent from 1998 to 2002. Cheap credit also abounds. In 2004 almost a fifth of all new mortgages were interest-only loans (requiring no principal repayments in early years), the study finds. Speculative booms usually end when some speculators cash in or when credit tightens.

Even if home prices don’t collapse, their long-term performance may disappoint. In a new edition of his book “Irrational Exuberance,” Yale economist Robert J. Shiller, who accurately diagnosed the stock “bubble” of the 1990s, examined home prices since 1890. His startling conclusion: After adjusting for inflation, home prices rose only 0.4 percent annually through 2004. After periods when they’ve outpaced inflation — say, right after World War II — home prices slow down. Their recent surge is, by Shiller’s figures, unprecedented. The implication is that prices may soon enter a period (after inflation) of stagnation or decline. That would probably preserve big gains for longtime homeowners, though perhaps not for the 22 million who purchased in the past three years.

As Shiller notes, home prices can’t rise too much faster than average incomes for too long without excluding many buyers from the market. Among home builders, realtors and economists, the dominant view seems to be that the housing market is basically sound. Younger families and immigrants underpin demand. Some local “bubbles” may pop; elsewhere, price increases may subside. One way or another, Americans might want to reassess whether their passion for ever-bigger homes is good for them and the nation. Do we need to go from SUVs to Hummers? Maybe we should revert to sedans.