Bearish on McMansions

Posted on Posted in Financial Planning, Real Estate

The U.S. homeownership rate fell to the lowest level in more than 50 years in the second quarter of 2016 according to the latest census data. The last time the portions of households that owned their own home was this low was in the early 1960s when my father bought his first home as a young aerospace engineer. Since then, we’ve boosted homeownership with government programs designed to promote purchases among people who couldn’t otherwise afford it. Keep in mind that the portion of upper middle class households, that is those earning between $100,000 and $350,000, has grown sharply in recent decades to make up 30% of our households today. These represent most of the buyers of nice single family homes. This group can continue to expanding until the next economic recession which is likely sooner rather than later. When that happens, we are likely to see a drop in this portion of households and a strain on the values of nice single family homes. Newer homes in larger developments (sometimes referred to as “McMansions”) are likely more vulnerable than older homes that are comparatively valued lower to begin with and have lower probability of adopting to other uses (for example, conversion to duplexes or commercial space).

Other trends like low interest rates, flight of young upper income workers to urban areas, and increasing property taxes also factor into the home value forecast. There is nothing here to support a rise in home values. If this is true, then it is less likely that our children will be able to afford to take over our homes at the same debt level as we had.

It seems to me that either we must return to the type of economic policies that encourage ascending middle income home ownership or we risk a correction in values of individual homes, especially the larger single family homes.

Overall, I’m bearish on the value of nice suburban homes. Specifically, it seems that the probability that these homes will fall in value over the next economic cycle exceeds the probability that they will be worth more than today.

What does all this mean? That dream house that you’ve always wanted will evrntually be available at a lower price than it it today. The question is: will you want it then?

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