With the cost of a new house seeming to defy gravity, many would-be home buyers suffering from sticker shock are baffled by the relentless run-up in prices. The explanation may, however, be simple — houses have gotten bigger.
Twenty-five years ago, the average price of a new home in the U.S. was $76,400, according to the National Association of Home Builders. By last year, the price had shot up to $274,500.
But in 1980, the average home was 1,740 square feet, had three bedrooms or less, and two bathrooms or less, according to U.S. Census figures. About a quarter of the new houses you looked at in 1980 would have had no garage; a third would lack air conditioning.
Last year, the average new home buyer bought 2,349 square feet of living space, with at least three bedrooms and two-and-a-half bathrooms, with a garage that held at least two cars. Some 90 percent included air conditioning.
Not only are today’s new houses packing more square footage, they have more volume -- nine-foot ceilings are becoming the norm. Today’s homebuyers are demanding separate rooms for media centers and home offices, spacious walk-in closets, and kitchens you’d expect to find in a restaurant. New houses today are built with higher-quality materials, from better finish and trim to granite countertops in the kitchen and bathroom. Buyers are demanding -- and getting -- central air, state-of-the-art security systems and broadband wiring for the Information Age. All of which is helping to push home prices higher.
There’s another major force driving up home prices: Rising wages and increased buying power continue to push prices higher, according to David Berson, economist at Fannie Mae.
“Home prices over the long run tend to grow — not at the rate of inflation — but instead at the rate of income growth,” he said. "Which, over time, is above the rate of inflation by usually about 1.5 to 2 percentage points."
And, even as wages have rising, falling mortgage rates have allowed home prices to go up even faster than income growth, said Berson. Compared to the average 1980-vintage mortgage —at 15 percent interest — the cost of buying a home is less than half what it was 25 years ago.
To be sure, there are still plenty of would-be homeowners who feel priced out of the housing market. But based on overall buying power and affordability, housing in the United States is as cheap as it's been in 25 years.
Take an average couple who have saved a year’s earnings to put down on their new average home. Last year, that down payment would have left them saddled with a $247,044 mortgage. But 25 years ago, a down payment of a year’s salary would be left the buyer of an average home with a mortgage of just $63,920.
Ah, the good old days. But take a closer look. Last year’s average home buyer financed their purchase with a 5.5 percent, 30-year fixed mortgage, leaving them with monthly payments of $1,403 — or about 2.7 paychecks of $528, the average weekly wage in 2004. But for our 1980 homebuyers, the $808 monthly payment on the average 30-year fixed mortgage — of 15 percent — would have burned through 3.4 paychecks, when weekly wages averaged $240.
In other words, after buying their house in 1980, Mr. and Mrs. Average Homebuyer were left with $54 a week (or about $123 in 2004 dollars) to pay for taxes, food, clothing, car payments — the works. By 2004, the family budget had $204 a week to spend after making the monthly mortgage payment.
Doing more at home
Conspicuous consumption is only part of the reason for the expansion of American homes. Though demographers have been predicting for years the trend toward smaller American families would eventually bring about smaller average house sizes, the average home buyer has found ways to use more space, not less, according to Dan Levitan, a Florida-based consultant to home builders and developers.
“We look to a house to do more things that we did in the past,” he said. "We work in the house, we recreate in the house, we spend time on the Internet and our kids play Game Boys instead of joining Little League. So to that extent we need more house because we do more things in the house.”
To be sure, it’s not clear how much of all this bulking up is a function of need — or want. The Baby Boom (a.k.a. the Me Generation) is famous for its penchant for immediate gratification. Now, with a massive shift in inherited wealth from the previous generation, Boomers can afford ever bigger residences. But demand for bigger homes is just as strong from younger buyers, according to Gopal Ahluwalia, an economist with the National Association of Home Builders
“We thought Generation Y was going to get by on less,” he said. “But they’re going the other way around.”
Housing analysts say that although they see no signs of a slowing in this trend toward bigger and bigger homes, at some point it will level off. But there are no signs of that happening yet, said Levitan.
“I don’t think were going to end up with the average person in the country living in a 20,000-square-foot house,” he said. “But we still have along way to go to get anywhere near the maximum.”
One force that could slow the swelling of American homes is the rising cost of energy. In the late 1970s, a prolonged rise in energy prices took a toll on expansive, poorly insulated homes —often dubbed “white elephants” by owners who were sometimes forced to sell at below-market prices. Higher energy costs then sparked a major drive to improve energy efficiency through improvements in design, materials and building standards — along with more efficient appliances and heating and air conditioning systems.
But with houses getting bigger and home electronics consuming more and more power, today's new homes are once again using more and more energy. That creates a new opportunity for home buyers and builders to find even more ways to conserve, according to Brian Castelli, executive vice president of the Alliance to Save Energy.
“I think people are going to be pushed to do more as houses are getting bigger and ceilings are getting taller,” he said. “They’re going to see bigger bills unless they start to design those homes to be much more energy efficient and use more energy efficient appliances … for the fifth TV or the third computer.”
But while the size of the average American household continues to shrink, homes are still getting bigger and better appointed. Industry analysts say the reason is simple -- new home buyers are demanding more space and better amenities than they were a generation ago.
“If someone is there to buy it, builders will always be there to answer the call," said Levitan.
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