Here’s a chart from the recent Star Tribune economic trend piece about how “big houses are making a comeback:”
As you can see, Midwest homes are smaller on average than the US as a whole, which surprises me given the straightness of our roads, but probably shouldn’t given how the Midwestern economy is generally lagging the nation. (Right?)
Here’s the best part of the Strib article:
Ryan Cook, 30, and Trent Kasper, 25, are building a 4,000-square-foot house in Minnetrista, in a development where hundreds of new houses are planned. Theirs will have four bedrooms, three bathrooms, an upper-level laundry and an unfinished basement where they might add a home theater or playroom for future children.
[…]
They are paying about $560,000 for the house, and said the current market was part of the draw. They’re expecting to get an interest rate of about 4 percent.
“That’s the only reason we can afford what we can afford,” Cook said. “Ten years ago, you couldn’t have gotten this big.”
The surrounding development, when it is complete, will have a pool, a clubhouse and baseball fields.
Chris Galler, CEO of the Minnesota Association of Realtors, said the draw for buyers is simple: “It’s brand-new.”
Thoughts? How do you think the Twin Cities fits into this picture?
People who are in the realm of paying for something only because interest rates are low, are the first to be royally screwed as the market inevitably corrects. Especially in the $400+ price point. Why? If interest rates go up to 10%, or even 7-8%, a large portion of the folks who could buy a house in that tranche will be pushed to lower price points. The demand will get pushed to lower cost housing, and the demand for more expensive homes will evaporate. Prices will go down by 30-60%, and likely stay. So I hope folks buying $500+ McMansions on 4% credit plan to stay a while, or can take a six figure loss when they look to sell in a few years.
It seems that the general narrative of progress is that early 20th century, we didn’t care about pollution. Starting before and accelerating after World War II, we started getting obsessed with cars an suburbanization. But now we’ve turned a corner, and are “conserving”, “going green”, becoming more multi-modal, etc.
Yet articles and charts like this clearly show: despite minor blips like the recession, we’re continuing to double-down on this trend, building larger and larger homes for smaller families, larger garages to store lots of also-expensive vehicles. And that’s just what you pay for; of course, we have finished streets and high-quality infrastructure to your door, and new freeways and bridges to bring you where you want to go, on the public’s dollar.
We’re killing the earth more rapidly, and sentencing ourselves to a lifetime of debt to pay for it all.
A few questions that we’ve talked about before:
How much of this is driven by city zoning?
How much of this is driven by developers wanting to maximize profit?
How much of this is driven by actual demand from consumers. How many would buy a new 1500 square foot single family house on a modest lot in the suburbs, assuming such a thing were actually available, which it’s not.
The comments in the article from outside experts were interesting — that there may be demand for more responsible development, but the building industry isn’t there yet.
I’d think marketability of more expensive, labor-intensive materials, finishes, and safety features could provide a better, smaller home while still being profitable for the builder. Concrete or paver driveways rather than asphalt, hardwood floors rather than carpet or laminate, tile rather than sheet vinyl, fiber-cement lap rather than vinyl siding, etc. Even installing sprinkler systems as a matter of course. What’s interesting is that the last item just became law (for homes 4000 sq ft +), saving lives in addition to providing more work for builders. Yet Builders Association of the Twin Cities lobbied against that as an unfair “tax” on big homes.
Of course, building a high-quality smaller home still doesn’t resolve the financial impacts — but it would at least mean less waste of materials and land, and longer-lasting finishes that preserve the positive image of a house and neighborhood.
it’s not just profitability, but risk – homebuilding is pretty conservative because the developer is typically fronting the cost of just a relatively few units. Even big developers aren’t high-volume the way retailers are. So the market changes pretty slowly.
And of course income inequality and credit inequality means that the focus is going to be high-end, not low-end – there’s not a huge middle demand in any real estate market.
I feel like I couldn’t even enjoy a house that large as my conscience would be nagging at me for wasting resources on something so egotistical.
Matt is right though, it’s incredibly alarming to hear that QE and artificial market manipulation are the “only reason we could afford this.” When that goes away, you’re going to be in for a world of hurt.
But hey, you could probably pack like 5-7 units in that house with a little work.
At the risk of straying in to monetary economics, where I’m a novice at best, Interest rates are not super low because of “QE and artificial market manipulation.”
And things are not as simple as Matt presents, as higher interest rates would also be associated with faster economic growth and greater returns on non-house investments, all of which complicates the picture.
So, yeah, in general low rates are going to make buying a house cheaper, but whether an uptick in rates is going to create chaos depends on a lot of other factors.
Ha, I was thinking I couldn’t enjoy a house that large as it would take 3X as much work as my house to keep clean.
it comes with a lot of upkeep costs – the maid, the lawn service, the heat and water bills…
A recent episode of “Househunters International” on HGTV featured a family moving from suburban Salt Lake City to Denmark. As they walked through the second house in Copenhagen, the woman commented “You just don’t realize how supersized everything in America is.” The marketing folks seem to have figured out that all you have to do to sell something in this country is supersize it. Hence, 32 oz soft drinks. I’m astounded at how big pickup trucks have grown – many could carry a spare car along. Even the Japanese auto makers seem to have figured that out. Toyotas and Hondas have grown significantly in just the last few years.
I can’t imagine being 25 years old and purchasing a $560,000 house. Although I had (still have) student loans at that age, I don’t know how a 25-year old even understands the burden being taken on. Ugh. Regardless of size that’s taking a huge bet on how your adulthood will pan out.
I seem to have worked with a lot of folks in their late 20s and early 30s buying houses with that big of a mortgage. Maxing out what they can get with two incomes in the ramp up to prime earning years. But, yikes! It leaves zero room for error. We need to stop thinking of highly-leveraged house purchases as investments. And we need to incentivize actual investments – instruments by which you can’t easily default if your life takes any turn off the happy path.
Personally I love my small apartment but most people I know that have moved or are looking to move, want a larger apartment or house. To some, size matters ; )