The Revenge of the McMansions

From 1982 through 2006, 37,654,400 million new homes were completed in the U.S. at a cost of $5.89 trillion. And houses got bigger every year. House size, as measured by average square feet, increased each year for 25 years, so by 2006 the average house size was 2,469 square feet, up 759 square feet from 1982.

It may be that homeowners used the equity associated with the added space in their homes to support their appetite for home equity loans. According to BusinessWeek, February 18, 2008 issue (page 34), "Between 2001 and 2006, borrowers cashed out $1.2 trillion from their homes."

This $1.2 trillion is almost identical to the $1.23 trillion that was added to the total new home construction cost due to increased home size from 1982 to 2006. How did I (RAH) arrive at the $1.23 trillion figure? Assume a building scenario in which houses stayed at a constant 1,710 square feet, the 1982 size. Given this scenario, the total construction cost for all new homes from 1982 to 2006 would have been $4.66 trillion, or $1.23 trillion less than the $5.89 trillion actual construction cost. So home buyers spent an additional $1.23 trillion to get larger homes.

I am not sure if the two numbers are merely a coincidence or suggestive of a cause and effect. If they are meaningful, it seems that many home owners got hoisted by their own petard; because so much of their income is committed to pay for, furnish and maintain the larger house, they are forced to borrow against its equity to meet other obligations like making prompt credit card payments (used to buy stuff for the house), paying college expenses for the kids and health bills for the family.

So now, many homeowners are stuck with lots of debt and oversized, equity-free houses that cost a small fortune to maintain. Most will be able to keep their homes, but many will not.

Sometimes less is better than more.

Note: See companion spreadsheet for housing data sources and computational details.

Posted February 12, 2008.