Manny Gonzalez – Go Big, Go Home, or Go Rent

Builder & Developer

August 7, 2015

When it comes to choosing a home these days, Baby Boomers are going big and the Millennials are going home, or if mom and dad are lucky, they are renting.

For Americans 45 and over, the rich have gotten richer. “If you had a lot of money in the stock market, it has doubled since 2009,” says Stephen Melman, Director of Economic Services for the National Association of Home Builders. At the same time, the tax code—via the mortgage-interest-deduction—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, according to housing economist Tom Lawler, have helped enable those households who wanted to increase their investment in housing as an asset to buy larger, more expensive homes.

According to the American Enterprise Institute, today’s new homes are 1,000 square feet larger than in 1973, and living space per person has doubled over the last 40 years. The average household size has declined from 3.01 persons per household on average in 1973 to a new record low of 2.54 in 2013. As a result, the square footage of living space per person in a new home has increased from 506.6 to 980 in the median size home. Despite this jump, the inflation-adjusted price of new homes has been relatively stable since 1973 in a range between about $105 and $125 per square foot, and on an inflation-adjusted basis, we are actually paying slightly less today than the cost per square foot in 1973.

While the volume of new single-family homes built is near record lows, the median sales price of new homes hit a record high of $283,000 last year, according to the Joint Center for Housing Studies of Harvard University’s State of the Nation’s Housing 2015 Report. Rather than signaling a broadly healthy market, however, this record-setting price is largely due to changes in the size, quality, type and location of new homes.

Toll Brothers has positioned themselves as an industry leader in delivering homes that meet this market need. The company’s Montecito community in Las Vegas features open, flexible, single-level homes great for entertaining and taking advantage of spectacular views of the Las Vegas Strip and Red Rock Canyon National Conservation Area. With homes starting around 2,500 square feet on 65’ x 120’ lots and selling in the mid $500,000s, a high price for Vegas, sales have been strong. Over 20 homes sold before models even opened. Toll’s Estates at Saddle Ridge in Reno has larger, single-level, luxury homes on minimum 100’ x 120’ home sites. There are very few projects of this size in single story in that market. While the price point is similar to Montecito, these homes are aimed at executive families and empty nesters with frequent guest or family and start at nearly 3,200 square feet going up to 4,240 square feet.

While the rise of American home prices can be attributed to size, quality and type, it’s still location, location, location that drives the price. Toll’s Capri Collection Hidden Canyon is completely different than the company’s Nevada communities. This collection of singlefamily luxury homes, designed to deliver the most premium single-family residence in the 4,600- to 5,000-square-foot range, sit on a “compact” 55’ x 100’ sized lot. Surrounded by open space and canyon views in a new staff- gated community in Central Orange County, the Capri Collection redefines elegance in home design and commands a sales price in low $2 millions. And, there is no question the buyers are there, over 3,000 people attended Hidden Canyon’s Grand Opening in April of this year.

While homebuyers seem to have a big appetite for supersizing, the national homeownership rate actually slid for the 10th consecutive year in 2014 to 64.5 percent according to the Joint Center for Housing Studies, and continued to fall in early 2015 with a first-quarter reading of just 63.7 percent—the lowest quarterly rate since early 1993. Not surprisingly, the homeownership rate for 35-44 year olds has fallen the most and is down 5.4 percent from the 1993 level and back to a level not seen since the 1960s. But the winds of change are blowing.

The Housing Vacancy Survey—the timeliest of the sources—reported a marked pick up of household formation in the fourth quarter of 2014 that brought growth for the year to 800,000, closer to its long-run potential. The Joint Center for Housing Studies projects that demographics will support baseline household growth of just under 1.2 million annually in 2015-2025, with the Millennial generation driving much of the growth.

According to Fannie Mae’s National Housing Survey for the fourth quarter of 2014, 82 percent of respondents thought that owning made more financial sense than renting. Even among renters, 67 percent agreed with this statement. Among renters aged 18-39, 92 percent expected to buy homes eventually, although 62 percent of those renters reported that getting a mortgage would be difficult for them. Ivy Zelman’s research actually found that about half of those 62 percent probably would qualify.

NAHB shows the entry of the first-time homebuyer into the market has already started. The median single-family square floor area decreased from 2,414 in the third quarter to 2,385 square feet at the end of 2014 and down from 2,460 square feet in 2013. And NAHB projects that as more first-time buyers return to the market, typical home size will continue to post slight quarterly declines. So while some homebuyers will continue to go big, the Millennials will soon be living in a new home they buy rather than going home to live.

Manny Gonzalez, AIA, LEED AP and principal is the senior partner with national awardwinning KTGY Architecture + Planning. Based in Los Angeles, he may be reached at