Are McMansions a McThing of the Past?
Friday, June 1, 2007provided by
Are McMansions McOver?
Opinions vary, even among the experts.
Ifrecent trends are any indication, however, the bigger-is-betterapproach to residential real estate may already be giving way to a morereasoned levelheadedness, both in home buying and building.
White elephant sale
No,don't expect a return to that less-is-more, small-is-beautifulaesthetic from the Age of Aquarius; there is absolutely nothing austeregoing on here. Rather, call it a redefinition or right-sizing of whatwe consider luxury living that has more to do with architectural scale,energy efficiency and creating livable space than with gross squarefootage.
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Like some real estate equivalent of theSUV, McMansions have been the object of scorn and ridicule since theystarted elbowing their way onto the suburban landscape in the late1980s and early 1990s. Loosely defined as a house between 5,000 and10,000 square feet with soaring grandiose entryways and multicargarages, often jammed onto an undersized lot, McMansions quickly wentfrom ostentatious status symbol to something even the Joneses didn'twant to keep up with.
"I think a lot of people who could wellafford a McMansion today would find it embarrassing on aesthetic,environmental and political grounds, rather like movie stars who couldafford a Hummer but choose instead to drive a Prius," says architectJames Gauer, author of "The New American Dream: Living Well in SmallHomes."
Shifting winds
As a historicconfluence of factors -- boomer inheritances, the post-2000 tech stockcollapse, superlow interest rates, the mortgage lending explosion --drove America on a cattle stampede to invest in real estate, more andlarger forces -- including energy costs, higher interest rates, themortgage lending implosion and demographic shifts -- have now slowedthe market to a surly teenager's stroll.
The housing times, theyare a' changin' -- again. If during the past couple of years you boughta much larger home than you needed, primarily for investment purposes,you might want to cover your eyes now.
"I firmly believe thatwhen the housing market slows, you'll see a short-term drop in thedemand for large homes. But in the longer run, it's going to be evenmore challenging to sell these because the average household size ofthe boomers is going to go down as the last kids leave," says ThomasLawler, 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."
Meaningthe inventory of McMansions is likely to grow. And grow. And grow.Could we one day see a landscape with large white elephants lingeringon the market?
"I find it difficult to see how we won't," Lawler says.
GopalAhluwalia, vice president of research for the National Association ofHome Builders, isn't as quick to perform last rites on the McMansion.
"Thereis 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 arenot on their way out; they have slowed down with the whole housingmarket," he says.
In recent years, McMansions also became an attractive alternative to investing in the stock market.
"Weknow that, beginning right around the latter part of 2003 and 2004,there was a fairly dramatic increase in the number of people who boughtreal estate as an investment," says Lawler. "There are two ways that anindividual can increase their investment in real estate: buy a rentalproperty or just buy a bigger home. Most people want to invest in realestate but not everyone wants to be a landlord."
During the past30 years, a curious phenomenon occurred: The size of American homesincreased at the same time that family size decreased. Ahluwalia saysthe average home size has grown from 1,500 square feet in 1970 to aprojected 2,450 in 2006. U.S. Census figures show the average householdsize declined from 3.14 people in 1970 to 2.58 people in 2002.
Ahluwaliasays the average home size and what Americans consider their optimalhome size seem to have reached a sweet spot at roughly 2,400 squarefeet, 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. Thecost of maintaining a McMansion continues to rise. Energy, insuranceand home maintenance costs are all affected by home size. Energy costshave been on a tear nationally; over the past three years, natural gasis up 43 percent and electricity rose 12 percent, according to the U.S.Energy Information Administration. If you own an average-size home butfancy a McMansion, imagine these bills suddenly doubling. Or tripling.
McFinancing. McMansionslooked better when interest rates were lower. With rates on a 30-yearfixed mortgage at 6.29 percent as of early May 2007, a $1 millionMcMansion would cost you $6,183 per month; the same manse at 5.28percent in June 2003 would have cost you $5,541 a month.
"Interestrates are still relatively low, but as rates rise, as they inevitablywill, the cost of financing the 5,000 square feet you think you wantwill look very unattractive compared to the cost of financing the 2,000square feet or less that you actually need," says Gauer.
McTaxes.It's hardly news that municipalities from coast to coast have beenrapidly 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 Americaare scurrying to bring real estate appraisals up to date so theyreflect currently inflated values. For many homeowners, the tax bill ismore than doubling."
McInvestment. As thehousing market slows to a crawl, the demand for McMansions as aninvestment has declined. "An obvious reason is the desire for people tohave a larger amount of their net worthinvested in real estate has gone down," Lawler says. "You would expectthat the larger homes are going to have less home price appreciation,and possibly more home price depreciation, over the next decade thanwould be the case for the smaller homes. There is a tendency for peopleto focus on how much housing they actually want."
McResale.Simply put, who's going to want my McMansion? The buyer pool may bedrying up as boomers downsize for retirement and Gens X and Y eschewsize for more modest, versatile modern spaces they can afford. If youbuilt a much larger home than others in your neighborhood, it may takeyou additional time to find a buyer.
Ahluwalia recently polled 50select architects for an NAHB study, "The Home of the Future." Theconsensus was that America's new home aesthetic emphasizes upgradedamenities (premium countertops, hardwood floors, heated flooring,Sub-Zero refrigerators), increased functionality (larger and moregarages, multiuse rooms), higher ceilings and improved light (morewindows, recessed lighting), all in a footprint of about 2,400 squarefeet.
"Previously, more people were saying, 'We want space. We'lladd the features later on.' Now, a lot of people are saying, 'We wantfeatures.' That is the main difference," says Ahluwalia.
Thatsaid, he expects McMansions to remain a viable and even desirableoption well into the future, even if it takes longer to find the rightbuyer. The reason? It's as simple as human nature.
"Why do peoplebuy huge houses? Because they can afford it. It's the same as askingwhy do you buy a $90,000 Mercedes when the same function can beprovided by a $30,000 car? I can afford it, I like it and I have enoughto 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."
