McMansions Fading Away?

Just a few months ago we were being tolderroneously, in our view–that the McMansion was making a big comeback. Then, last week, there were a wave of stories lamenting the declining value of McMansions. Bloomberg published: “McMansions define ugly in a new way: They’re a bad investment –Shoddy construction, ostentatious design—and low resale values.”  The Chicago Tribune chimed in “The McMansion’s day has come and gone.” Whither are these monster homes headed?

Even “Downton Abbey” is past its heyday (Highclere Castle)
Even “Downton Abbey” is past its heyday (Highclere Castle)

First, as we’ve noted, its problematic to draw conclusions about the state of the McMansion business by looking at the share of newly built homes 4,000 feet or larger (one of the standard definitions of a McMansion). The problem is that in weak housing markets (such as what we’ve been experiencing for the better part of a decade in the wake of the collapse of the housing bubble) the demand for small homes falls far more than the demand for large, expensive ones. So the share of big homes increases (as does the measured median size of new homes). And indeed, that’s exactly what happened post–2007: the number of new smaller homes fell by 60 percent, while the number of new McMansions fell by only 43 percent, so the big homes were a bigger share (of a much smaller housing market).  Several otherwise quite numerate reports gullibly treated this increased market share as evidence of a rebound in the McMansion market; it isn’t.

We proposed a McMansion-per-millionaire measure as a better way of gauging the demand for these structures, and showed that the ratio of big new houses to multi-millionaire households did indeed peak in 2002, and has failed to recover since. We built about 16 McMansion per 1,000 multi-millionaires in 2002, and only about 5 in 2014.

Another way of assessing the market demand for behemoth homes is by looking at the prices they command in the market. What triggered these recent downbeat stories about McMansions was an analysis entitled “Are McMansions Falling out of favor” by Trulia’s Ralph McLaughlin, looking at the comparative price trajectories of 3,000 to 5,000 square foot  homes built between 2001 and 2007 and all other homes in each metropolitan area. McLaughlin found that since 2012, the premium that buyers paid for these big houses fell pretty sharply in most major metropolitan markets around the country. Overall, the big house premium fell from about 137 percent in 2012 to 118 percent this year.

Screen Shot 2016-09-13 at 1.18.08 PM

In a way, this shouldn’t be too surprising. Part of the luster of a McMansion is not just its size, but its newness. Like new cars, McMansions may have their highest value when they leave the showroom (or the “Street of Dreams” moves on). According to the Chicago Tribune’s reporting on this story, apparently today’s McMansion buyer wants dark floors, gray walls, and white kitchen cabinets, very different materials and color schemes than last decade’s big houses. As they age, we would expect all vintage 2005 houses to depreciate, relative to the market. This gradual decline in value is essential to the process of filtering–housing becomes more affordable as it ages. (And at some point, usually many decades later, when the surviving old homes acquire the cachet of “historical” — they may begin appreciating again, relative to the rest of the housing stock).

There’s another factor working against the McMansion, in our view. In general, these large homes have generally been built on the periphery of the metropolitan area, in suburban or exurban greenfields. As we’ve shown, the growing demand for walkability and urban amenities has meant an increase in prices for more central housing relative to more distant locations. Its likely that this trend is also hastening the erosion of the big house premium.

Finally, there is a financial angle here, too. McMansions were at the apex of the housing price appreciation frenzy of the bubble years. You took the sizable appreciation in your previous house, and rolled it over into an even larger house–hoping to reap further gains when it appreciated. The move-up and trade-up demand that fueled McMansion demand has mostly evaporated. Despite gains in recent months, nominal home values in most markets haven’t recovered to pre-recession levels, and adjusted for inflation, many home owners have yet to see a gain on their real estate investment. According to Zillow, the effective negative equity rate (homeowners who have less than 20 percent equity in their homes) was 35 percent.

There will always be people with more money than taste, so there will always be a market for McMansions (or whatever fashion they might evolve into next). But many of the market factors that combined to boost their fortunes a decade ago have changed. Consumers now know that home prices won’t increase without fail and the interest in ex-urban living has waned. Homeownership overall is down, andmuch of the growth in homeownership will be among older adults (who probably won’t be up-sizing).

  • Pat
  • Sarah Hummel

    The thing I see missing from this discussion is the city version of the new construction single family McMansions popping up all over Lake View/Northcenter/Logan Square. Such as this house next door to me. http://www.zillow.com/homedetails/2935-N-Seeley-Ave-Chicago-IL-60618/2105719123_zpid/ A quick Zillow search for 4+ bedroom SFH costing more than $1 million yields 129 results in area roughly between Diversey & Irving Park and from the river to Racine. Not all are brand new, but a large percentage are teardowns of 2 and 3 flats to make way for single family homes for the 1%, as was reported by WBEZ in March. https://www.wbez.org/shows/wbez-news/building-up-and-tearing-down-even-as-demand-grows-some-chicago-neighborhoods-dont/5b809742-4c8b-4615-8907-e3cac111d8eb

  • JustJake

    Article speaks from the blinders-on perspective of someone biased in the “New Urban Agenda”, and that’s not the majority viewpoint. Family living and top schools flourish outside the oversold urban lifestyle. Just wait, everything has its cycle, and then it repeats.

  • Actually if you juxtapose the “New Urban Agenda” along with the near collapse in some areas of the suburban office park it makes a lot of sense.
    If corporations are moving their headquarters and branch offices to the city its for a reason.

  • JustJake

    Things get moved. And then things get moved back. Everyone was rushing to Silicon Valley. Now they are rushing away. Millenials are waiting, (not by choice) to be able to join the homeowner & family part of their lives. The current urban-trend promotion has served to erase, for the short term, that option.

  • davistrain

    I’m reminded of the term “tainted money” with regards to how people afford these large abodes: They’re bought with tainted money, tain’t yours and tain’t mine.

  • Anne A

    This trend and the corresponding decrease in population density is really hurting some of our neighborhood small business districts.

  • 66 City

    The change to sprawling communities of gigantic homes, with everyone depending on personal automobiles for daily living, was the result of a strong propaganda arm in society, and a one-time cheap energy blitz in the form of easy petroleum. We were upsold “lifestyle” by mass media and advertising. We bought more than we could afford, and we can’t even keep what we have in decent shape.

    Now we’re at the end of the cheap-hydrocarbon era, and industrial society’s accounting doesn’t add up. Most of us first-worlders can’t afford to function in the world as it’s been built in the past few generations. The huge ecological footprint of many American communities costs too much in taxes, and in ecological health. The “wealth” simply isn’t there.

    The spread-out form of America is going to dust, but each region will go to dust in its own way, unique to its environmental constraints. Our hyper-technological society is a juggling act that won’t last forever. We’re already seeing the pieces crumble, from nuclear meltdowns to overdrawn water systems.

    When we let “capitalists” keep so much of “their” gains, while we let the foundation of civil society rot — that won’t go well for long.

  • JustJake

    That lecture/sermon has been given many, many times recently, and represents the opinions of some. I’m not defending mansions, but I’ll posit that the current “trend” of putting up urbanization as the answer is erroneous. It’s also a trend, is over-sold, and desires to be subsidized by government & taxpayers in areas of transit, housing and infrastructure.

  • 66 City

    Sure, I’m not saying anything new. But I think it’s erroneous to write off urbanization as something that “desires to be subsidized by government & taxpayers.” There is virtually no form of existence in America that not only wants to be subsidized, but in fact is.

  • JustJake

    Density in America peaked in the 50s and has declined since then. This is contrary to what urbanists say is happening, more appropriately this is what urbanists _want_ to happen, and isn’t a majority opinion.

    http://www.citylab.com/housing/2016/09/the-difficulties-of-density/499571/

  • ohsweetnothing

    You’re right, but the 1% comment tacked on at the end is lazy and lets a lot of people off the hook. It’s easy to cast the people doing it as evil-elite “1%” types, but I know a couple of families who’ve done this and they’re well-to-do white collar types who “want to stay in the city” but need “space for our growing family”.

    In fact, I suspect it’s a big reason people don’t address this issue head on more often. It’s easier to demonize and protest the big evil developer of a tower than the building being gut rehabbed by a family who just got a promotion out of middle management and a second kid on the way, despite (imo here) the latter being far worse for the neighborhood.

    Now if you want to talk 1% issues, look at Lincoln Park…where 2-3 LOTS are now being bought for gigantic SFHs. DNA or NPR did a story on that a year or so ago too.

  • Sarah Hummel

    Income needed to get a thirty year mortgage for a $1.5 million mortgage assuming a 20% downpayment and minimal other debt is around $325-375k/annually. Based on 2014 US Census Bureau data, that’s the top 3% of the US income distribution. Median income for a family of four in the Chicago-Naperville-Joliet census area (the smallest unit the data is broken down) is approximately $61k. So you’re right, I’m off by 2% in my 1% comment. However, those $1.5 million homes in North Center are just as unattainable as the $5 million multi-lot mansions in Lincoln Park for the vast, vast majority of Chicagoans. And IMO, the misperception that those who can afford the down payment and mortgage on a new construction SFH that costs over $1 million are not among a very small percentage of people doing extremely well financially is both belied by the data and dangerous for urban planning purposes.

  • ohsweetnothing

    You’d be correct if all of these conversions were $1.5M, but you included Logan Square in your initial comments and as fast as that neighborhood has gentrified, $1M is pretty close to the ceiling there. You can find these types of homes for a third of that price (which I’d argue is more in the “McMansion v.1” price range) or even in the 300s if you just want a former 2-3 flat that has already been gutted and ready for conversion.

  • Deplorable Momma

    In spite of the efforts to proclaim the era of big houses to be over, there are few family homebuyers looking for less. Sure, they may say they want less, but then they realize they still want walk-in closets, master bedrooms with spa-like en suite bathrooms, huge kitchens with walk-in pantry and a big center island, etc.

    In order to continue the myth that the era of big houses is over, they’re digging for people who bought at the very peak of the real estate market around 2005,

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