McMansions Lose Their Allure As Home Buyers Downsize

Not only is the brutal recession driving more Americans into McDonald's for a cheapmeal, but it has also dulled their appetite for McMansions.

AP

Home buyers have lost their enthusiasm for the sprawling houses that cropped up across U.S. suburbs over the past decade. Having learned that property values can go down as well as up, they are flocking to smaller homes that are cheaper to buy, furnish and heat.

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Homebuilders—one of the first sectors to feel the bite of the downturn—are rushing to accommodate this new frugality among first-time buyers.

"Entry-level buyers are coming out of rentals and coming out of apartments, and they are not looking for 3,000 or 4,000 (square) feet," Steve Hilton, chief executive of Meritage Homes Corp, told the Reuters Global Real Estate Summit in New York this week.

Meritage, which gets most of its business from first-time buyers, is going along with the trend. For example, it is selling a three-bedroom, 1,100-square-foot home in Phoenix for $95,000.

Those cheaper houses are also easier for buyers to finance in an environment of stricter loan terms. A dearth of credit for all but the best-qualified applicants is also forcing many customers to choose smaller homes.

Energy-efficiency helps make smaller houses appealing, said Meritage Chief Financial Officer Larry Seay, although—so far—many buyers balk at the additional $35,000 or so to equip a house with solar panels or equipment to send excess power back to a utility.

Small homes are also cheaper to build. They use fewer raw materials, less labor, and require a smaller lot, while inside the home, customers are cutting out luxuries. Marble countertops are out; Formica is in.

Median new home sizes grew for much of the post-World War Two period, from less than 1,000 square feet in the 1950s to 1,400 square feet in 1970, then more than 2,400 square feet in 2004.

According to U.S. Census data, the median size dipped in 2008 to 2,200 square feet, its first annual decline in 13 years, and has fallen further in 2009.

The reversal reflects Americans' nervousness about the economy and about the stability of their jobs, as well as restrictions lenders have imposed as a result of the ongoing financial crisis.

Homebuilders say they watch unemployment figures for a clue to the direction of their business. The national jobless rate, at 9.4 percent, is the highest in a quarter-century. Next week's report is expected to show a further rise, bringing the rate closer to double-digits, as another 368,000 people lose their jobs.

U.S. jobs and home sales have headed in the same direction in recent months -- down -- while mortgage rates have risen as bond market investors fret about future inflation and the long-term cost of stimulus spending.

Richard Dugas, CEO of Pulte Homes, which this year will become the biggest U.S. builder, expressed little concern about mortgage rates.

"The far bigger issue is the national economy and, frankly, how we all feel about our individual jobs," Dugas told the summit. "If consumer confidence is better, if we are feeling better about our job prospects, we're going to buy housing."

Right now, few are buying. A bottom for the housing market remains elusive. Wednesday's weaker-than-expected report on May new home sales underscored the fragility of the market. Sales slipped 0.6 percent from April to an annual rate of 342,000 homes, far below the pace of a year ago.

Buyers remain price-sensitive and often find what they want in an expanding array of foreclosed properties. "Despite price reductions and value-add upgrades, newly constructed homes simply cannot compete with the values found in the existing homes market," said Bob Walters, chief economist of Quicken Loans.

In terms of home size, a new survey from the American Institute of Architects supports the housing executives' comments. The poll of designers about their clients' tastes found that Americans increasingly prefer smaller homes and lower ceilings, in part because of energy costs.

According to the trade group, 50 percent of architecture firms find clients are choosing homes with smaller square footage, compared with 13 percent who said so in 2005.

Rather than making a home look better for an eventual sale, home owners want to make their space more livable, by fixing up their yards or basements. Almost two-thirds of architects reported demand for better access within the home, reflecting the aging population.

"Home sizes have been trending down recently," AIA chief economist Kermit Baker said. "The era of the 'McMansion' could well be over."

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