Samuelson: Larger homes for smaller families

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ROBERT J. SAMUELSON NEWSWEEK

Larger homes for smaller families

July 13, 2005

We Americans seem to be in the process of becoming wildly over-housed. Since 1970, the size of the average home has increased 55 percent (to 2,330 square feet), while the size of the average family has decreased 13 percent.

Especially among the upper crust, homes have more space and fewer people. We now have rooms specialized by appliances (home computers, entertainment systems and exercise equipment). The long-term consequences of this housing extravaganza are unclear, but they may include the overuse of energy and, ironically, a drain on homeowners' wealth. By and large, the new American home is a residential SUV. It's big, gadget-loaded and slightly gaudy. In 2001, about one in eight homes exceeded 3,500 square feet, which was more than triple the average new home in 1950 (983 square feet).

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Of course, homeownership (now a record 69 percent) symbolizes success in America. The impulse to announce more success by having more home seems to span all classes. In his book "Luxury Fever," Cornell University economist Robert Frank noted that Microsoft co-founder Paul Allen built a 74,000-square-foot house. According to Frank, that roughly equaled the size of Cornell's entire business school, with a staff of 100.

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These tax breaks go heavily to upscale Americans, who are thereby encouraged to buy bigger homes. Federal housing benefits average $8,268 for those with incomes between $200,000 and $500,000, estimates the study; by contrast, they're only $365 for those with incomes of $40,000 to $50,000. It's nutty for government to subsidize bigger homes for the well-to-do. But otherwise, why shouldn't Americans buy what they can afford? No good reason. The trouble is that freedom doesn't confer infallibility. With hindsight, some homeowners may regret sinking so much money into ever-grander houses. One possible problem is future operating costs. Suppose electricity or natural gas prices rise because (for example) new power plants or terminals for liquefied natural gas aren't approved.

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Even if home prices don't collapse, their long-term performance may disappoint. In a new edition of his book "Irrational Exuberance," Yale economist Robert J. Shiller, who accurately diagnosed the 1990s' stock "bubble," examined home prices since 1890. His startling conclusion: after adjusting for inflation, home prices rose only 0.4 percent annually through 2004... As Shiller notes, home prices can't rise too much faster than average incomes for too long without excluding many buyers from the market. Among home builders, real estate brokers and economists, the dominant view seems to be that the housing market is basically sound.

One way or another, Americans might want to reassess their passion for ever-bigger homes. Do we need to go from SUVs to Hummers? Maybe we should revert to sedans.



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