A Legacy of Excess

1990 Excess

I do a fair amount of driving in the course of a week and the other day the homes along my route made a lasting impression on me.  It wasn’t the architecture that caught my attention.  No, it was the ever increasing size of each property.

I thought, my god, why didn’t I explore this angle before.  It’s only been staring me in the face for a couple of decades or so.  Self depreciation aside, I realized I was witnessing our legacy of economic excess through the decades.

There is a lot of blame to go around for why the 2008 housing crisis happened.  Yes, banks made crazy loans.  And homeowners certainly used their houses like credit cards and then were stuck with the bill.  But one of the root causes of the crisis is our insatiable appetite for bigger and bigger homes.  I am not talking about “McMansions” either.  Rather the average size of a home has grown in leaps and bounds.

So out of curiosity I Googled the question of what is the average size of a home.  The data is quite alarming.  In a blog published by the National Resources Defense Council, “What’s going on with new home sizes — is the madness finally over?,” I discovered that the average square footage of a home increased from just under a thousand square feet in the 1950’s to almost 2400 square feet in the mid 2000’s.

The real estate research firm, Trulia, collected the data in a survey that took place in July 2010.  Findings from the 2010 Census bureau mirrored Trulia’s findings.  America’s preferences for the size of their homes are changing to smaller square footage.  But realistically, the damage is done.  Millions of the bigger homes have been built and stand as monuments to our infatuation with keeping pace with the Jones’.

While homes were growing in size, two other important social developments took place.  One, the size of families got smaller.  I wonder how many of my readers have heard the same stories as me — a family of 6 or more growing up in a very small house.

That is no longer the case.  Sure some families have a lot of kids, but according to the Census Bureau, the average family size is now 2.59, a small decline since 2001.  In 1950, data showed an average family size of 3.64.  That is a pretty big drop given how statistical averages work.  The biggest increase is one person households — now at 27% more than double the number from 1960.

A second important trend is the precipitous decline of median family income.  This trend first appeared in the middle to late 1990’s but it has really accelerated as of late.  Median income in 2000 was just over $56,000 and it now stands around $51,000 according to the Labor Department.

Boom and bust housing cycles may be compared to medical science, but only more extreme and apparent.  For example, cancer, while in remission, can still have microscopic cells spread that even the best of diagnostic technology cannot detect.  Housing is different.  The landscape is now littered with a metastasis of big homes that consumers will continue to buy even though they really can’t afford the payments.  The boom and bust cycle will continue unabated.

Even as housing slightly improves, there is no cure in sight.  Median income is still falling.  Homes are still to expensive.  Bill McBride of Calculated Risk estimated back in 2011 that home prices are at 2000 levels and likely to fall even more.  However, home prices since 2011 have actually increased slightly and while median income is still well below 2000 levels.

So what is a possible solution?  For starters, we have to stop thinking that more and more regulations issued by the Consumer Financial Protection Bureau or any other government agency can address this core problem.  Something more fundamental must be done.

Here are three ideas to consider.  One, how about knocking down and rebuilding existing homes that are already too big and replace with something smaller and more affordable.  Why must we have homes that are 2700 square feet and bigger?  Doesn’t it make sense to live within our means?  Plus this solution will be great for job creation within the home building sector and offer banks an opportunity to write loans that are theoretically less risky.

Second, for brand new homes, how about changing the design.  For the sake of discussion, what if we started building homes that cost around $200,000 but split between three families?  The entire subdivided living area could be on the first floor and common storage in the basement.  And what about taking it a step farther and power homes with solar energy.  I like the idea of creating value in a house and that should include energy efficiency.

Last, Fannie Mae, Freddie Mac, and banks should change underwriting regulations to accommodate two or more families living in the same house.  Fractional ownership makes all the sense in the world.  Some will say that banks will be unable to foreclose on a house then.  That is backwards thinking.  One shouldn’t the goal be to prevent foreclosures in the first place.  Second, how is fractional ownership any different than when many investors hold parts of a securitized loan?

Whatever the solutions, the time has come to start thinking outside the box if housing is going to reflect the economic realities of the 21st century.  If builders keep on building homes that cannot be afforded will housing ever truly recover and become sustainable?  The days of the 1950’s house below are long gone but our thinking has largely gone on unchanged.

Author: Robert Katula

What say you, the people?