Multiple factors behind the decline in starter homes in the United States

The starter home has disappeared from many housing markets:

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The affordable end of the market has been squeezed from every side. Land costs have risen steeply in booming parts of the country. Construction materials and government fees have become more expensive. And communities nationwide are far more prescriptive today than decades ago about what housing should look like and how big it must be. Some ban vinyl siding. Others require two-car garages. Nearly all make it difficult to build the kind of home that could sell for $200,000 today…

Nationwide, the small detached house has all but vanished from new construction. Only about 8 percent of new single-family homes today are 1,400 square feet or less. In the 1940s, according to CoreLogic, nearly 70 percent of new houses were that small…

But the economics of the housing market — and the local rules that shape it — have dictated today that many small homes are replaced by McMansions, or that their moderate-income residents are replaced by wealthier ones. (A little 1948 Levittown house on Long Island, the prototypical postwar suburban starter home, now goes with a few updates for $550,000.)…

The simplest way to put entry-level housing on increasingly expensive land is to build a lot of it — to put two, three, four or more units on lots that for decades have been reserved for one home.

The costs – financial, regulatory – are too high for the construction of lots of starter homes. The proposed solution is to try to reduce those costs by placing multiple residents on one lot and/or increasing density in communities and developments.

How to change all of this is difficult given the difficulties of addressing housing in the United States. The need is great, particularly when affordable housing is not aimed at a larger percentage of the population who would benefit from a cheaper residence.

I wonder if the best path forward is for certain communities to pursue starter homes successfully and show that it is possible. Of course, one danger is that even if it works well in some communities, other communities might leave the burden of such housing to a small number of communities. However, if starter homes can be constructed in such a way that they are perceived as an asset to the community and not a threat to property values, they might catch on. Are there several communities that would fit the bill?

Set up the millennials in a McMansion for a horror film

The recently released film Bodies Bodies Bodies takes place in a McMansion:

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What happens to a group of vapid, bored, rich gen Z-ers/millennials holed up in a McMansion during hurricane season when the wi-fi goes out?

If the film Bodies Bodies Bodies is anything to go by, they’ll probably end up killing each other — unless someone else does it first.

While some might say the McMansion itself is a horror, McMansions are no stranger to horror stories. How exactly might a horror film involve a McMansion? A few ideas:

-This particular film follows 7 friends. This means plenty of space for people to sleep, live, and interact. A McMansion provides plenty of space.

-The tackiness or gaudiness or lack of authenticity of a McMansion can provide a creepy or unsettling backdrop.

-The McMansion falls apart at a key moment or the limited architectural quality lets the characters down.

-The extra interior square footage a McMansion offers provides more space for nefarious actors to operate.

-The McMansion could be set in a neighborhood of McMansions, perhaps unfinished, that are all creepy and ominous.

A horror film set in suburbia can play off a common idea that suburban life is not as happy or successful as it seems. How much more so could this be true in a McMansion, a home that tries to broadcast its success in obvious ways.

Combine a horror film with the negative traits of a McMansion and there are plenty of options!

It cannot be a McMansion if it is valued at over $30 million and has mansion features

Actor Chris Hemsworth has turned a big home into an even bigger and more luxurious home in recent years. Is it a McMansion?

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After buying his Byron Bay family home for $7million back in 2014, Chris, 37, transformed the sprawling property into a compound that has been valued at between $30million and $60million.

The actor carried out extensive renovations on the six-bedroom home, and it now boasts a steam room, gym, media room and games room.

There’s also a stunning outdoor living area, play areas for his three young kids and a 50-metre rooftop infinity pool, which overlooks the ocean…

Angry neighbours were quick to say the rebuild reminded them of a suburban shopping centre, a refurbished RSL club or a regional airport terminal.

Others compared the home, which sits on 4.2 hectares, to a multi-storey car park and a ‘McMansion’.

While there is no mention of the square footage of the home, this description suggests this home is a mansion. Here are several reasons why: it likely has more space that a spacious McMansion (imagine 3,000-6,000 square feet there); it is not a mass-produced, cookie cutter home; it has numerous luxury features; it is not owned or renovated by a regular wealthy person but rather a global film star.

So why would a neighbor call it a McMansion instead of a mansion? I would guess that this was done to link the home to a pejorative term and to critique the architectural style of the home. A “mansion” could still be critiqued but the negative connotations are implied in McMansion. The other descriptions by neighbors have to do with the architectural style of the home, whether they are viewed as ugly or not consistent with the surroundings.

Is there a lesson in this? Here is one option: to fight the big home in the neighborhood, call it a McMansion. Label it a mansion and it might just justify the size, features, and architecture.

Separating McMansions from luxury homes

What is the difference between a McMansion and a luxury home? Here is one viewpoint:

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So, what exactly is a luxury home, Michael, you ask? Some people classify it by the style of the house, or perhaps by its finishes, or by the product brands in the home. So, how do we define a luxury home from a price standpoint? I know different brokerages and different real estate firms define luxury real estate differently. Many define a “luxury home” as a property that is priced at $1,000,000 or higher.  For the purposes of this article, we’re going to define a luxury home as a home that is listed for sale at at least three times the average sales price for that market. (There are four primary price points in most markets: starter-/entry-level, average, high-end and luxury pricing. I define high-end homes as homes that are two times the average sales price for that given area.)

Luxury is relative to that specific market. Most markets have luxury homes based on our definition; it’s all relative, however, because when people think of luxury, they often think of McMansions or estate homes, and that’s not always the case. To take action, you need to develop graphs and other visuals that can articulate the data for luxury and high-end real estate for/in your marketplace: Are you in a buyer’s market or a seller’s market? High-end and luxury homes start at what price point for your market?

I am interested in the ways the dimensions of a luxury home are different than those of McMansions. This is based on my four traits of McMansions.

  1. The absolute square feet of the home is not mentioned above. Presumably, both McMansions and luxury homes are large.
  2. The relative square footage is also not mentioned above. Perhaps luxury homes are generally larger than McMansions?
  3. The architecture and design is mentioned as luxury homes may have particular features and/or finishes. While McMansions are often criticized for mass produced features and/or poor architectural choices, luxury homes stand apart from this.
  4. The luxury home is more expensive, whether over $1,000,000 in price or some multiplier above the market or in a tier above others. McMansions are more expensive than small homes or starter homes but they are not as pricey as luxury homes. The luxury home is then a true luxury good available only to a few while McMansions are meant to appeal to a broader audience.

If the description above is correct, luxury homes are mostly different because of their price at the top end of the market. McMansions are not that; they may aspire to be luxury homes but they are for a different price point and have different features that have less to do with square feet and more to do with design elements or features.

(The next step might then be to provide advice for real estate agents and others who want to appeal to McMansion buyers and owners. How to stay away from luxury home territory and above more typical homes?)

Numbers on the reduced inventory of starter homes in the United States

I have noted the decline of starter homes in multiple posts (examples here and here). Here is recent data from the National Association of Home Builders and the National Association of Realtors about this decline:

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Homes ranging in price from $100,000 to $250,000, the typical cost for an entry-level home, have seen nearly a 28% decrease in inventory from a year ago, says the National Association of Realtors.

And smaller homes are also in short supply. In 1999, 37% of newly-built single-family homes were smaller than 1,800 square feet. By 2020, that share had fallen to 25%, Dietz said.

In comparison, in 1999, 66% of newly-built single-family homes were smaller than 2,400 square feet while in 2020, that share had fallen to 57%.

These are two very important factors for getting into purchasing a home. A lower price means a smaller down payment and mortgage is needed. Smaller homes are cheaper because they have fewer square feet and cost less to construct.

And without this ability to enter the housing market, it will take potential homebuyers longer to enter, if they can enter at all. This precludes them from building housing equity and stepping up to larger or more expensive residences in the future. It limits the ability of people to pursue homeownership, a goal many Americans have.

Tackling both price and housing size will be difficult in many markets where developers, builders, and those in the real estate industry can get more. Yet, here is an opportunity to appeal to an important sector of potential homeowners if solutions can be put into practice.

Trying to sell a home outfitted for COVID life

Doing more life, work, and school from home during COVID-19 means that some homes going on the market now have unique features:

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As the spring home-selling season gears up, homeowners who installed temporary or permanent amenities to accommodate COVID-19-era living now must navigate a maze of no-win decisions. Should they leave as-is the bedrooms converted to offices, the chest freezers parked in the garage, the bidet toilet seats warming their bathrooms, the bulky exercise equipment flexed in the basement — in hopes that buyers can look past the COVID clutter to see the bones of the house? Or must they dismantle it all, potentially subjecting themselves to additional chaos if another virus variant forces yet another retreat?

According to an analysis released in April by construction equipment firm Bid-on-Equipment, 89% of homeowners nationally have tackled home improvement projects since the COVID-19 virus began forcing many Americans to spend more time at home for work and leisure. The average cost of those projects was $3,797. Illinois residents made bathroom renovations their top priority, the analysis found…

Now, all that extra gear is part of their everyday lives and they have no intention of letting a new buyer have it, she said. Customers would rather put their top-end appliances in storage and swap in new, but lower-end, appliances, for the duration of a sale, Hood said. Then, they reinstall their coveted appliances in their new houses…

The pandemic also amplified the long-term preference for flexible rooms that can be easily be devoted to a single purpose, such as a second home office or even an isolation bedroom for a quarantined family member.

I have argued before that one of the reasons Americans tend to like bigger homes is that extra space provides options. Need a hobby room or a guest bedroom or space for clothes or a workout space or an office? That McMansion can accommodate you.

For sellers, it seems like a key would be to present the kinds of flexible options with the space that buyers might want. Do they want an office setup? A workout space? This might requires playing to some categories but I would guess that the price of the residence and the surrounding community provide plenty of clues about what potential buyers might want.

More broadly, if homes and residences need to be more flexible in the future, this could lead to significant changes. Imagine less permanent walls and more dividers. Or, fixtures, appliances, furniture, and rooms that can be more easily altered by the typical resident. This does not necessarily mean people will live in the larger equivalent of a studio apartment – or the giant kitchen/living space combo – but many rooms may also not be the answer.

That McMansion space comes in handy during a pandemic, Australian edition

An editorial in the Sydney Morning Herald notes that the square feet available in a McMansion can be useful:

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The trend to large new houses with multiple bathrooms and bedrooms is decades old but they have proved especially handy over the past two years because lockdowns and quarantine rules have forced people to stay indoors more than usual.

Home schooling and working from home is easier with a separate dining room or living room and the hundreds of thousands of people now forced to isolate at home will be glad if their house has extra bathrooms.

“Many households are wanting larger homes than they did before the pandemic. The combination of the time confined at home during lockdowns and the likely future of more working from home has brought the quality and size of one’s home sharply into view,” Reserve Bank of Australia assistant governor Luci Ellis told the federal inquiry into housing affordability in November.

Yet once the pandemic passes, one of many aspects of Australian life that may come up for discussion is whether we need to keep building such big houses.

In a typical housing unit, people spend more time in some spaces than others. The kitchen can function as the hub of the home.

Yet, in the midst of a pandemic when people are home more and the home may need to provide more different kinds of spaces, having more rooms and space helps. The open concept kitchen and great room is central in many larger dwellings but such spaces do not work as well with working from home, running a household, and other activities. A larger house at least provides options, even if the layout is not the most conducive to more private separate spaces.

What happens after the pandemic? As the editorial notes, questions will persist about large homes. Australians and Americans have been asking about the need for the largest homes for the world for several decades and people keep buying them. Will there be an interest returning to smaller spaces and closer connections or will people want the option of more space should something every come up? Of course, in the meantime that space can be used for storage or other activities…

The capacity of a big box store with COVID distancing guidelines

Big box stores are ubiquitous in the United States today. From Walmart to Costco to Home Depot and more, they line major roadways and attract many shoppers. Outside of briefly considering how many people could fit into one of the buildings during Black Friday shopping or when seeing an empty building serve as a COVID-19 vaccine site, I do not regularly contemplate the capacity of the structures.

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Yet, in a recent trip to a nearby Target, I saw a sign stating how many people could be in the store given COVID-19 distancing guidelines. The number: 672 people. If that is the crowd allowed during COVID-19, the capacity during regular times must be quite a bit higher. Here are some numbers for Walmart stores in April 2020 when they imposed restrictions:

Starting Saturday, Walmart stores will allow no more than five customers for each 1,000 square feet of space. The restrictions will keep the stores at roughly 20% of their capacity, the company said. The average Walmart store is about 180,000 square feet. About 900 shoppers would be permitted in a store that size under the new restrictions.

From these numbers, the regular capacity for a 180,000 square foot store would be about 4,500 customers. The name big box store does not then solely refer to square footage; at full capacity a single store could hold more people than a small town or more than many full high school buildings.

Even during COVID-19, a large number of people are allowed in the building. I have been to big box stores during COVID but I do not think the stores were ever close to the reduced capacity. This does not mean I was not close to other customers; big box stores are set up like suburban subdivisions where foot traffic is funneled to main arteries (primary roads) and different sections have their own aisles (side streets). Still, there was a lot of room to operate in buildings that sometimes can seem to stretch out to the horizon.

Quarantining at home away from other residents, considering the size of the home and the layout

For roughly a year and a half, numerous Americans have quarantined themselves not just from work or school but from the other members of their households. Having more room in the residence and having particular floor plans would seem to help.

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First, having more square feet would allow the residents to keep more distance and could provide the quarantined person more space to operate. Quarantining for a week or two could feel more burdensome if someone is restricted to a small room or portion of a residence. Space provides options for rearrangement.

Second, square footage might not be everything as the floor plan can matter. Large common spaces, a regular feature of many newer homes, would be off-limits. A more closed-off floor plan with separated rooms might work better. Even better could be a separate wing – imagine a bedroom and bathroom on one side of the house or on another level than the other bedrooms. For example, a split-level could be split between the quarantined and everyone else. Or, an in-law suite or numerous bedrooms with en suite bathrooms. In contrast, a ranch home with all the bedrooms near each other and a large living space might limit options.

Few people likely purchased their homes or rented particular places with a pandemic in mind. But, considering medical issues is not out of the question for many when looking for a place to live. Think of mobility concerns or aging in place. Or, if someone has a serious illness, where might a hospital bed fit or how would an alternative sleeping arrangement work out?

All I have is anecdotal evidence on this through observing the setups of people on social media. It appears most just block off a bedroom or office type of space in the home for the quarantined person. This works well if you have extra space or a room that is used occasionally. I suspect this is not so easy with less space or a layout that makes it difficult to isolate a single person.

Big drop in construction of starter homes of under 1,400 square feet

For younger adults looking for smaller homes to purchase as their first home, there at least one reason they are not easy to find: few have been built in recent years.

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The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low, and data on new construction from the National Association of Home Builders shows that single-family homes are significantly bigger than they were years ago.

Homeowners from previous generations had access to smaller homes at the start of their financial lives. In the late 1970s, an average of 418,000 new units of entry-level housing were built each year, according to data from Freddie Mac. By the 2010s, that number had fallen to 55,000 new units a year. For 2020, an estimated 65,000 new entry-level homes were completed…

“What was really striking to me was the consistency in the decline in the share of entry-level homes, irrespective of geography,” Mr. Khater said. “The thing that struck me the most was that really, it’s all endemic. It’s all over the U.S. It doesn’t matter where.”…

Homeownership leads to greater wealth for those who buy earlier. An analysis from the Urban Institute estimates that those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s. Meanwhile, those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.

Three things stand out to me from this article:

  1. The decline in the construction of these smaller homes is real. The numbers cited above suggest roughly 15% of these smaller homes are constructed now compared to the late 1970s.
  2. At the same time, the definition of an entry-level homes is contingent on square footage. These days, 1,400 square feet is not that large for a home. These standards have changed over the decades; new homes in the 1950s in Levittown were more around 1,000 square feet while many new homes today are over 2,500 square feet. As builders construct larger homes (presumably making more money) and some buyers want larger homes, what is now an entry-level home may have changed.
  3. The final paragraph above considers the wealth implications about being able to buy a home earlier on. This is important: homes are one of the biggest generators of wealth for Americans. Yet, this also marks a shift in viewing homes as investments as opposed to good spaces for people to live.