Wednesday, January 02, 2008

Bigger Homes = Bigger Mortgages

The average home has been steadily increasing in size and number/quality of amenities for generations. The 800 sq. ft. homes that had one electrical outlet in each room and where people once raised eight or nine kids gave way to much larger homes by the time I was a kid. My parents still live in the rambler they built 45 years ago. It has 1100 sq. ft. up and down (for a total of 2200). We had only one bathroom until Dad added a second one when he finished the basement during my early teen years. Still, my folks raised five kids in that home and we didn’t feel deprived.

This Gainesville Sun article reports that the average home size has grown roughly 20% over the past decade and a half, while the average number of dwellers per home has decreased slightly over that same period. (Also see this Zillowblog post.) We are getting more floor space for fewer people. The Kaysville, Utah family of five featured in the G-Sun article is upgrading from a 2100 sq. ft. home to a 5700 sq. ft. home. They essentially say that they need the space because they’ve got more stuff than people used to have. The G-Sun article says, “In much of the country, the growth in big houses is fueled by suburban homebuyers seeking luxury, rather than big families needing space….”

The average family’s mortgage debt-to-income ratio has increased pretty much directly proportionate to the increase in average home size. Clark Howard reported on his 10/12/07 show (see here) that over one generation, “Mortgage debt has risen 50 percent, while the average size of a home has risen 50 percent!”

It isn’t necessarily the cost of the amenities we are adding to our homes that is at the root of our mortgage debt increase. The real cost of better stuff has steadily decreased over time to make it more affordable. (See this Money Magazine article for some interesting insights.) A big plasma TV today is no more expensive in real terms than was a basic b/w TV set in 1960. But it requires a lot more space, so we build bigger and more opulent homes, which demand bigger and more oppressive mortgages.

An interesting feature of our economy is that this constant push for bigger homes affects everyone. A spokesman for the National Association of Home Builders reports, “You cannot sell a new home today with 1½ bathrooms,” which was the average home in 1970. “Even if only two people are in house, they still want 2½ to three bathrooms.” In other words, housing expectations have increased across the board, even among the poorer classes. So everyone, including the person that rents, is affected.

This would all be fine if housing costs as a percentage of family income had remained steady. But that’s not the case. Total family compensation has increased dramatically during my lifetime, mainly due to the increase of two-earner families and the increase of employment benefits. (Wages not including benefits have remained roughly stagnant.) But for all this added income, a greater percentage of it is going to mortgage debt than when we had single-earner families with fewer employment benefits. We are using this increased debt to fund bigger, nicer houses with a lot more stuff.

Our economy is presently structured to get people into debt early and then keep them there. During my lifetime, demand for debt instruments has exploded and the market has responded with increasingly easy credit. Median household debt from all sources has increased 1200% since I was a child. That’s a good way to get lots of stuff before you have to pay for it, but it’s not a good way to have peace of mind.

It is possible to have the peace of mind of minimal or no debt, but it requires a lot of dedication and a willingness to be satisfied with less stuff than your income peers. This kind of peace does not fall from the sky. It requires serious focus and effort. It requires swimming against the current of what everyone else is doing. Thanks to many blessings, my wife and I have been able to manage our household of seven on a single income for many years, which is certainly not what most others are doing. Lower cost, low debt living is not easy. But it’s worth it.


Jesse Harris said...

We're also much dumber about the homes we buy. The home we live in now has a ton of wasted space because it's not laid out effectively. I'd gladly trade down to a smaller home with a better floor plan. It becomes really obvious how true this is when you take a look at some of the model apartments at Ikea. A master bedroom half the size of our current one has significantly more usable space from smart design.

I'm also disturbed at the modern insistence that children are entitled to their own bedrooms. It's bad enough that we can sometimes get sucked into our electronic gadgets when we're all in the same room, but adding social isolation into the mix? It's not healthy for families to sequester themselves in their own private bedrooms every waking moment.

Anonymous said...

I have felt that same feeling of swimming against the current to maintain a lower debt load and raise my family on a single income.

We have what we need, and we're happy, but we have to remind ourselves that there is a difference between what we need and what we see in every piece of junk mail.

Also I have to agree with Jesse about the difference a floor plan can make and the benefits of living together in our home. We have an open floor plan that makes our home feel almost spacious.

A family of 6 really can live comfortably together in a 2000 sq ft home if they remind themselves that what is important is the family and not the stuff. (Less stuff makes it easier to fit.)

Frank Staheli said...

Our city, when I was on the city council, and against my vote, required that homes have a minimum of 900 square feet. Most people used to live their entire lives in less than that.

It's frustrating that the Olene Walker housing fund SEEMS to cause part of the affordable housing scarcity--here's why I think so: home builders know that if they just wait, they can get free money to build such homes AS WELL AS the money that they can get when they sell them.

The demand is there, but government works in myriad ways to prohibit the supply of the housing that so many of us need. (Admittedly, the demand is much higher as well for homes that we can't afford, as you say.)

y-intercept said...

I think the article is wrong. Starter homes fly off the market quicker than a wink. In every American market you will find people absolutely desparate to find starter homes. If there was a house with a single bedroom and a single room in the Salt Lake Valley, it would be sold before getting listed.

Unfortunately, the flip your house craze has people buying up the small inventory and turning them into larger homes for the oversaturated mid range market.

There are no new starter homes because they've been zoned away as there is a chance that poor people might live in them.

That One Guy said...

Reach, et al... I've been thinking about this post all day, and if you'll allow me a moment of shameless self-promotion here, I'll note that the idea of value is created not in sheer space, but in economic use of that space. Yes, a family can live very well in a space that is designed to maximize the opportunities that exist in well executed space design. That is why my little pet project, has come along so well of late. Our philosophy is that you don't need 4500+ square feet to have "value", or even utility. You can get the same "value" from a 2500 square foot space that is well designed. Granted, our project appeals to a certain individual, but the concept of well executed and economical space is there for sure.

And one note about affordable housing at the right price points. One of the MAJOR reasons there is a dearth of affordably priced homes right now is that the dirt is still very expensive. Even in "crappy" locations. When a housing market runs up like ours has over the last five or so years, those holding dirt think it's GOLD. They are often the last to allow prices to go down again. It's starting to happen again, but slowly. Another reason for the lack of these homes right this very moment is the simple fact that many who could afford these homes are first-time home buyers, or those whose income/employment situation will not sustain a home payment that is very high. These are people who may have credit risks in their profile, and these are the mortgage loans that are simply not available right now. Unless you have AT LEAST 10% down and good credit, you're renting for the next 12-18 months. Period.

The other thing with lots is that with the huge market run up of late, builders scarfed up land to hold. Many of those builders are hurting badly right now, because loans are hard to come by, so we will see a lot of that land re-enter the marketplace in the next 9 months or so.

Here's hoping anyway.

Scott Hinrichs said...

These comments are marvelous. TOG, your shameless self promotion is welcome. It is interesting to note the lack of availability of starter homes in the current market. Here's hoping that, as TOG suggests, this dynamic changes over the next year. Frank makes a good point about communities that essentially ban starter homes in the name of promoting higher property values and keeping out the riff-raff.

Our first home a couple of decades back was a tiny place on a 1/6 acre lot that shared a carport wall with a nearly identical home on the next lot (i.e. "twin home"). Back then a number of homes in the neighborhood were foreclosing -- at least two on every block. Many families had bought homes during a period of extremely high interest rates. Many had ARMs. But then rates came down after many years of high rates. Those that had good enough credit refinanced. Those that did not could not. When people got behind on their payments, they either ended up with a distressed sale (that's how we got our home) or they went through foreclosure. It was a grim sight. But for first-time buyers like us, there were plenty of starter homes available.

Today there is a dearth of starter homes. The problem is actually worse in many European countries. Young families have to wait for years to get a tiny apartment with exorbitant rent. Hopefully the problem in Utah will normalize with the bursting of the housing bubble.

Jesse Harris said...

I guess I know who I need to talk to when I'm looking at a new house! ;)