Monday, November 12, 2007

Interesting Little Tidbit

This is from
Mansions may face resale obstacles
By Jay MacDonald •

Are McMansions McOver?
Opinions vary, even among the experts.

If recent trends are any indication, however, the bigger-is-better approach to residential real estate may already be giving way to a more reasoned levelheadedness, both in home buying and building.

No, don't expect a return to that less-is-more, small-is-beautiful aesthetic from the Age of Aquarius; there is absolutely nothing austere going on here. Rather, call it a redefinition or right-sizing of what we consider luxury living that has more to do with architectural scale, energy efficiency and creating livable space than with gross square footage.

Like some real estate equivalent of the SUV, McMansions have been the object of scorn and ridicule since they started elbowing their way onto the suburban landscape in the late 1980s and early 1990s. Loosely defined as a house between 5,000 and 10,000 square feet with soaring grandiose entryways and multicar garages, often jammed onto an undersized lot, McMansions quickly went from ostentatious status symbol to something even the Joneses didn't want to keep up with.

"I think a lot of people who could well afford a McMansion today would find it embarrassing on aesthetic, environmental and political grounds, rather like movie stars who could afford a Hummer but choose instead to drive a Prius," says architect James Gauer, author of "The New American Dream: Living Well in Small Homes."

Shifting winds
As a historic confluence of factors -- boomer inheritances, the post-2000 tech stock collapse, superlow interest rates, the mortgage lending explosion -- drove America on a cattle stampede to invest in real estate, more and larger forces -- including energy costs, higher interest rates, the mortgage lending implosion and demographic shifts -- have now slowed the market to a surly teenager's stroll.

The housing times, they are a' changin' -- again. If during the past couple of years you bought a much larger home than you needed, primarily for investment purposes, you might want to cover your eyes now.

"I firmly believe that when the housing market slows, you'll see a short-term drop in the demand for large homes. But in the longer run, it's going to be even more challenging to sell these because the average household size of the boomers is going to go down as the last kids leave," says Thomas Lawler, a housing consultant based in Vienna, Va. "Builders will respond by reducing the number of those homes they build, but you can't turn that on a dime."

Meaning the inventory of McMansions is likely to grow. And grow. And grow. Could we one day see a landscape with large white elephants lingering on the market?

"I find it difficult to see how we won't," Lawler says.

Gopal Ahluwalia, vice president of research for the National Association of Home Builders, isn't as quick to perform last rites on the McMansion.

"There is a definite decline in those homes, but are they on their way out? No. This happens often as the housing market goes up and down. They are not on their way out; they have slowed down with the whole housing market," he says.

The SUV of suburban homes
In recent years, McMansions also became an attractive alternative to investing in the stock market.

"We know that, beginning right around the latter part of 2003 and 2004, there was a fairly dramatic increase in the number of people who bought real estate as an investment," says Lawler. "There are two ways that an individual can increase their investment in real estate: buy a rental property or just buy a bigger home. Most people want to invest in real estate but not everyone wants to be a landlord."

During the past 30 years, a curious phenomenon occurred: The size of American homes increased at the same time that family size decreased. Ahluwalia says the average home size has grown from 1,500 square feet in 1970 to a projected 2,450 in 2006. U.S. Census figures show the average household size declined from 3.14 people in 1970 to 2.58 people in 2002.

Ahluwalia says the average home size and what Americans consider their optimal home size seem to have reached a sweet spot at roughly 2,400 square feet, less than half the size of the smallest McMansion.

"I don't think the home size will continue to increase anymore," he says.

The trouble with hugeness
There are numerous reasons why McMansions are in decline:

McMaintenance. The cost of maintaining a McMansion continues to rise. Energy, insurance and home maintenance costs are all affected by home size. Energy costs have been on a tear nationally; over the past three years, natural gas is up 43 percent and electricity rose 12 percent, according to the U.S. Energy Information Administration. If you own an average-size home but fancy a McMansion, imagine these bills suddenly doubling. Or tripling.

McFinancing. McMansions looked better when interest rates were lower. With rates on a 30-year fixed mortgage at 6.29 percent as of early May 2007, a $1 million McMansion would cost you $6,183 per month; the same manse at 5.28 percent in June 2003 would have cost you $5,541 a month.

"Interest rates are still relatively low, but as rates rise, as they inevitably will, the cost of financing the 5,000 square feet you think you want will look very unattractive compared to the cost of financing the 2,000 square feet or less that you actually need," says Gauer.

McTaxes. It's hardly news that municipalities from coast to coast have been rapidly reappraising and reassessing homes to capture revenue based on "bubble" values. Not good news if you own a McMansion.

"I think property taxes are getting to be a huge factor," says Gauer. "Cities and towns across North America are scurrying to bring real estate appraisals up to date so they reflect currently inflated values. For many homeowners, the tax bill is more than doubling."

McInvestment. As the housing market slows to a crawl, the demand for McMansions as an investment has declined. "An obvious reason is the desire for people to have a larger amount of their net worth invested in real estate has gone down," Lawler says. "You would expect that the larger homes are going to have less home price appreciation, and possibly more home price depreciation, over the next decade than would be the case for the smaller homes. There is a tendency for people to focus on how much housing they actually want."

McResale. Simply put, who's going to want my McMansion? The buyer pool may be drying up as boomers downsize for retirement and Gens X and Y eschew size for more modest, versatile modern spaces they can afford. If you built a much larger home than others in your neighborhood, it may take you additional time to find a buyer.

Ahluwalia recently polled 50 select architects for an NAHB study, "The Home of the Future." The consensus was that America's new home aesthetic emphasizes upgraded amenities (premium countertops, hardwood floors, heated flooring, Sub-Zero refrigerators), increased functionality (larger and more garages, multiuse rooms), higher ceilings and improved light (more windows, recessed lighting), all in a footprint of about 2,400 square feet.

"Previously, more people were saying, 'We want space. We'll add the features later on.' Now, a lot of people are saying, 'We want features.' That is the main difference," says Ahluwalia.

That said, he expects McMansions to remain a viable and even desirable option well into the future, even if it takes longer to find the right buyer. The reason? It's as simple as human nature.

"Why do people buy huge houses? Because they can afford it. It's the same as asking why do you buy a $90,000 Mercedes when the same function can be provided by a $30,000 car? I can afford it, I like it and I have enough to spare. It does not have to do with the functional need of the space. If the lifestyle can afford it, it's a good investment."

Jay MacDonald is a contributing editor based in Texas.

No comments: