May 17th, 2011 (Modified on May 18th, 2011)

Should we celebrate lower home prices?

by Peter Miller


homebuyer-sellerCould it be that lower home prices are actually good news?

Writing in the Washington Post recently, Robert Samuelson argues that “housing’s troubles may have a silver lining. If you’re a homeowner, the steep fall in prices is calamitous. But if you’re a future buyer, it’s a godsend. What we’re seeing is a massive wealth transfer from today’s older homeowners to tomorrow’s younger homeowners. From year-end 2006 to 2010, housing values fell $6.3 trillion, reports the Federal Reserve. Assuming there’s no sharp rebound in prices–a good bet–that’s $6.3 trillion the young won’t pay.”

There is some truth to Mr. Samuelson’s view, at least in the sense that we all love a going out of business sale. Of course, at such events the business owner looks at his or her filled parking lot and wonders where the buyers were before. After such events, we look at the empty parking lot and realize the store is really gone and that’s not good for us, the owner, the employees, local businesses that sold things to the store, or the local government which is no longer collecting taxes from the store, its employees or owner.

In a similar way, I wonder what’s appealing in the lower home prices we now see. Yes, it’s true, homes are more affordable, you can buy more house with a given level of income and you need less money down. Throw in today’s mortgage rates and it’s a great time in many markets to buy.

But why would anyone want to buy a house if the prospects for future price increases are nil? Strike out future price growth and renting has a new attraction.

Size matters

“Falling real estate prices have also affected new homes,” writes Samuelson. “They’re getting smaller and less embellished, as they must. New homes typically sell at a 10 to 20 percent premium over comparable existing homes. If prices don’t fall, buyers won’t buy. From 1973 to 2007, the size of the average new home grew by about 50 percent, from 1,660 square feet to 2,521 square feet. By 2009, that was 2,438 square feet, with more declines expected.”

But the issue of excess square footage with new homes really has its roots elsewhere.

Homes became bigger in the recent past because builders could make more money per unit by putting larger homes on smaller lots. That’s how we got the McMansion: great rooms the size of Carnegie Hall, massive townhouses, and higher prices for builder stocks. But does anyone really need or want acres of indoor space? Such size violates my first rule of real estate: “Never buy a house you don’t want to clean.”

Samuelson writes that many Americans are “over-housed”:

The relentless expansion of home size since World War II–encouraged by federal subsidies, including the mortgage-interest tax deduction–arguably resulted in many Americans being “over-housed.” Homes grew beyond what was “needed” or could even be enjoyed. The reason they kept expanding, Cornell economist Robert Frank has argued, was social competition. People want to be in the “best” neighborhoods with the “best” schools, and these neighborhoods have ever-larger homes. Somewhat smaller homes, Frank contends, won’t make people less happy.

Agreed, but another reason massive new homes do not work concerns household size: The number of people per household is declining as families have gotten smaller. Combine fewer people per household with bigger homes and you get massive amounts of excess space per person–in practice, too much space for many prospective buyers. It’s like ice cream: a scoop or two is okay, but eating a half gallon at one sitting just isn’t wise.

Given the decline in home prices, more and more people can afford big homes, but who wants them? It’s not price or today’s mortgage rates that’s driving people from the McMansion section of the housing market, it’s practicality.

Peter G. Miller is syndicated to more than 100 newspapers and operates the real estate news site, OurBroker.com.

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2 Responses to “Should we celebrate lower home prices?”

  1. Richie Says: May 17th, 2011 at 5:28 pm

    “But why would anyone want to buy a house if the prospects for future price increases are nil?”

    Buying a house isn’t about getting rich down the road, or investing. Or at least it SHOULDN’T be.

    Buying a house should be about improving your quality of life. I’ve been priced out of the housing market in California, although I think we might be getting close to my affordability. I don’t care if my house never appreciates. I don’t even really care if my house depreciates (as long as I can keep positive equity so I can afford to sell at a future time).

    I want to buy a house so:
    - I know the option of living there as long as I want is up to me.
    - My landlord can’t raise the rent on me.
    - I can upgrade my house to my satisfaction, without the risk of moving out 3 months after putting new carpet in.
    - As I hit retirement age, my house could be paid for so the cost of shelter won’t be a factor while living on retirement funds.

    Picking up some appreciation over the years would be a nice perk, but I sure hope the recent trend of getting rich from housing appreciation is gone forever. It’s not healthy (for the economy or society) or sustainable.

  2. Tim Manni Says: May 18th, 2011 at 10:54 am


    You make some great points, thanks for commenting.


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