Why New Homes Have Become More Expensive: They’re Much Bigger
Prices of new homes have zoomed higher over the past few years. One big driver: the growing size of the American home.
Economists at CoreLogic last year concluded that around half of the 18% gain in new-home prices between 2010 and 2013 stemmed from changes in the size and quality of new homes, which are laden with more amenities such as fireplaces, walk-in closets, and additional rooms.
The CoreLogic analysis used data published by the Census Bureau that constructs a price index based on “constant-quality” homes—that is, what prices would look like over time for homes with the same size and amenities.
The phenomenon of more expensive—and bigger—homes isn’t brand new, of course. Before the housing bubble, home sizes grew steadily every year. Tom Lawler, an independent housing economist in Leesburg, Va., recently used the constant-quality price index to examine home prices going back to 1970.
Last year, new homes sold for an average $343,000, more than double what they sold for in 1970 after adjusting for inflation. His analysis showed that if builders had sold homes with similar characteristics to those sold in 1970, average prices would have been much lower, at around $199,000. That is up just 23% from 1970 after adjusting for inflation.
The upshot is that much of the increase in new-home pricing over the past 45 years stems from the fact that homes are getting bigger and fancier. Mr. Lawler says that isn’t terribly surprising, but he does wonder why average new-home sizes have swelled over a period in which the average American household has gotten smaller.
Half of all homes built last year had more than 2,415 square feet, an increase of 55% from 1,560 square feet in 1974.
Government housing policies may be responsible for some of this trend, he says. Beginning in the 1990s, government-supported lending programs encouraged homeownership with easier underwriting standards, including lower down payments and relaxed debt-to-income requirements. Falling interest rates, meanwhile, have helped households qualify for more debt without increasing their monthly payments.
The tax code—via the mortgage-interest deduction—also rewards households that take on more debt. In 1986, Congress eliminated the ability to deduct interest on credit cards and other consumer loans but left it intact for mortgages. These policies, Mr. Lawler wrote, “helped enable those households who wanted to increase their investment in housing as an asset, rather than pay less for housing save more of their homes.”
The trend in larger homes over the last few years is more pronounced because builders have been building far fewer homes. One possibility is that builders have focused on larger homes because those offer better margins. A more troubling possibility is that they’ve abandoned the entry-level market because demand simply isn’t there.
Over the last few months, however, new-home sizes have ticked down, and median prices fell in March, using a 12-month moving average. That could be a sign more builders have decided to accept thinner margins to boost sales volumes of homes that are a bit smaller.
Try our FREE Home Valuation Today! Click Here, to REQUEST one.
No comments:
Post a Comment