McMansion - I'm NOT Loving It.

Excerpts from "The Death of the McMansion" by Witold Rybczynski of Slate.com

The U.S. housing market is going through an adjustment of historic proportions. Before 2006, when the housing slump commenced, American home builders regularly built as many as 2 million new houses annually, rarely less than a million. This amount was needed to keep up with new household formation, immigration, homeowners moving up, and replacement due to obsolescence. Since then the number of new houses built has dropped drastically-the seasonally adjusted annual figure announced by the federal government in February 2011 was about 400,000! What's going on?

The recession, obviously. High unemployment and unease about the economy have made potential first-time homebuyers leery of entering the market, and many have decided to wait on the side lines. Although house prices have fallen, few are convinced that they have bottomed, and no one wants to buy a house and see its price decline. The large number of foreclosed (or about to be foreclosed) houses on the market, which account for no less than four out of 10 sales of existing homes, likewise dampens demand for new houses. And those willing to take the plunge discover that, despite low interest rates, lenders who were burned by the subprime mess now require large down payments.

The other chief cause for weak demand is a slowdown in household formation-the U.S. Census reports that the rate of household formation is currently lower than at any time since 1947, as people put off getting married and starting a family. According to real estate economist Peter Linneman, the marginal household size, which has historically hovered around two or three, shot up to more than six in 2009 and 2010, the result of doubling-up and moving in with relatives.

Common wisdom is that eventually the housing market will stabilize. Linneman expects housing to revive between 2012 and 2016. The young families that are sharing space will definitely want to move into their own homes, but what sort of homes? The increase in demand for rental housing has reinvigorated the apartment market, and some new construction has begun. What if people get used to renting? Owning single-family houses represents a long-established tradition that the U.S. shares with many countries (Canada, Australia, the United Kingdom, Ireland, the Netherlands, Norway), but 10 years is long enough for traditions and behavior to change. It is likely that in the future multifamily housing will represent a larger share of the American housing market than the one-in-five new dwellings that has been the historic norm.

What about single-family houses, which will still remain for many people the home of choice? There is some evidence that urban townhomes and infill housing are more popular, as rising gas prices increase the cost of commuting. Higher energy costs also affect heating and air conditioning, which may have the effect of discouraging homebuyers from purchasing large houses with soaring entryways and expansive family rooms. While the evidence is fragmentary-the current reduction in average new house sizes has more to do with the preponderance of first-time buyers than an overall shift in demand-it is clear that the long recessionary cold-shower will dampen the exuberance that characterized the boom years of 2000 to 2005. That will mean smaller houses closer together on smaller lots in inner suburbs, fewer McMansions, and fewer planned communities in the distant hinterland. An alternative scenario is that American optimism will prevail and it will be business as usual, as happened during the boom of the 1950s following the Great Depression, or during the period following the Energy Crisis of 1973, when car buyers, after a brief flirtation with Japanese compact cars, embraced minivans and SUVs. But I wouldn't count on it.

Schern Richardson Finter Decker
www.realestatelawfirmphoenix.com