Allison Schrager: Don't just build smaller houses, get people to like them

My Manhattan apartment is about 800 square feet, the same size as my upstairs neighbors’ - except they’re a family of four plus a large dog. Much as that blows my mind, I also realize that, not so long ago, an 800-square-foot apartment for a family of four in New York would have counted as luxurious.

How far we’ve come. A married couple living in a 2,000-square-foot house in suburban Salt Lake City recently told the Times that, though they always imagined having several children, they were now reluctant because they would need a bigger house, which they couldn’t afford. Even if they were just rationalizing their decision, there is a correlation between falling birthrates and rising home costs.

The average size of a single-family house built in the 1960s was about 1,500 square feet, and homes within multifamily units were about 800 square feet. Now those figures are more than 2,000 square feet and more than 1,200 square feet, respectively. Over the last decades households also became smaller, decreasing from an average of 3.3 people in 1960 to 2.5 today. It’s almost as if every member of a household gets their own bathroom.

Not only have homes gotten larger, but Americans’ standards have risen. One reason is that the U.S. is richer, and as a society becomes more prosperous, it consumes more and better goods and services. This includes square footage of housing as well as amenities that are once viewed as luxuries but are now seen as necessities, such as dishwashers and air-conditioning.

At the same time, there is a housing affordability crisis. The median sales price for a house in the U.S. has increased 55% since 1990, after controlling for inflation, according to the Census Bureau. Partly this is because houses are bigger, and bigger houses cost more. But even on a per-square-foot basis, the price has increased 33%.

All of this raises a puzzling question for an economist like me: Why is the market supplying so much of what people can’t afford?

To some extent, supply created its own demand. Builders build bigger houses, and eventually bigger is what people expect. Another possible explanation is that people are willing to spend more on homes because they are increasingly seen as not just a place to live, but as an investment that will increase in value - and if you believe that, why not go as big as you can? And the government subsidizes mortgages, so taking on leverage is easier. The price of a home bought with an FHA-insured mortgage has increased 82% (after inflation) since 1992, compared to 47% for a conventional mortgage.

Then there is the simple fact that there are just a lot more wealthy Americans than there used to be. More Americans joined the upper middle class in the last few decades and can afford nicer, bigger homes. This demand has contributed to an increase in both home prices and homes with more amenities. Like other positional goods, houses say something about the status of their owner, and in some ways they set expectations for the neighborhood if not society. And most people don’t have the money to keep up with the Joneses, never mind the Zuckerbergs or the Griffins.

The key to making housing more affordable is both building smaller starter homes that people can afford, and changing preferences so people want to live in them. Building more starter homes may be harder, since the financial incentives are to build more expensive homes. Government interference in the market - using taxpayer money to build affordable housing, subsidizing mortgages, imposing zoning restrictions - creates another set of disincentives. Eliminating this interference is easier said than done, though there are some small ideas (prefabricated homes, anyone?) that could help.

Changing people’s preferences may be easier. There are already some signs that the popularity of slightly smaller homes is on the rise. If smaller homes become more affordable and available, then aspiring homeowners will eventually settle and be happy with them - as most homeowners are, even if they’ve got two kids and a dog in 800 square feet.

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This column reflects the personal views of the author and does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”

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