Friday, January 20, 2023

Is the era of large homes over?

Many countries in the world are failing to reproduce at replacement level. Russia and China are notable examples. The United States has fallen to the lowest birth rates in our history now below replacement levels at 1.7 births per female with 2.1 the standard measure for replacement. Many young adults are foregoing the family experience and those that do decide to have a family are often sticking to just one or two children. Since this is a real estate site I'll skip the economic issues and implications of a falling population. I do believe however this trend will lead to lower demand for large homes.

Builders like to have large homes as they tend to be more profitable, This is especially true of two story homes which have a larger living area with a smaller footprint on the lot. The notion of a five bedroom house was once commonplace but these days families with one or two kids are not really looking for that many bedrooms. Builders will adapt, we can bet on that. 

Over the last several years I have noticed that the price differential on resale homes between large four plus bedroom homes and smaller ranch style three bed homes has gotten very tight. A nice mid-grade remodeled 1990s five bedroom 2500 square foot home in East Vancouver might get $600,000 in the current market, but a similar 1990s mid grade home in the same neighborhood with 1400 square feet and three beds will fetch $500,000. Think about that for a second, the smaller house has 56% of the living space but costs 86% of the price of the larger house. 

There has always been a price per foot increase on smaller houses built on similar lots due to the fixed land and development costs. But the gap has tightened much more these days. Smaller homes used to be mostly in demand by first time buyers and older people downsizing. Now these small homes are also acting as move up homes for the older millennials coming from a townhouse, condo, or apartment. The pressure on the classic three bed, two bath ranch is greater than ever. 

Many builders locally are capitalizing on a growing population and a sizable number of out of area buyers to keep our local housing market going. But these builders are still building a lot of large 3000 SF homes with 4-5 bedrooms. That market may dry up here in the next year or two. The future seems to point to smaller homes with upscale models attracting a "move up" market as well as basic simple homes at more affordable pricing for first time buyers. Townhomes are also a rising star among the new downsized American family.

Sellers looking to sell a large older resale home should anticipate downward pressure on pricing over ht next few years even if the general market is advancing. After decades of housing size increases were are starting to see some shrinkage. The era of large homes may not be entirely over, but it is about to become a bit inventory bloated in the market.

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