Sunday, August 26, 2007

The End of McMansions?

This is a quick follow-up to some previous comments I made. I suggested that McMansions exist because they are a more efficient use of property than smaller homes. Specifically, we have to imagine what a neighborhood was like when it was built--it was on the edge of town, far from everything. The land on which each house was built was cheap, purchased from some farmer. Young families could buy a half acre but not a mansion. So they bought a half acre and a modest ranch house. In the 50 odd years since that time, the edge of Houston has morphed steadily outward. The old neighborhood is now much more centrally located, and its big lots an unimaginable luxury. For a home buyer, the only other place to get a big lot like this is way out on the edge of town, a million miles from where you work. So the old neighborhood is expensive now, and the price of a house has gone up a lot. If you're a spec builder or a developer, and you buy a house in Memorial to flip, it makes sense to go ahead and tear it down and build a McMansion in its place. The only people who can afford a house in Memorial are well-to-do--they are unlikely to want a modest starter ranch house.

But this activity has been fueled by rising house prices. And as this post by Kevin Drum indicates, economists believe that house prices (nationally) are set to decline for the first time in over 50 years. Indeed, it does look as if house prices jumped to artificially high levels starting in 1996. So if house prices decline, would it be economical for a spec builder to build a McMansion?

This question is complicated by the situation in Houston. I believe that house prices haven't increased in Houston at the same rate as in the rest of the country. And even if there is a credit crunch, Houston house buyers have another advantage--the price of oil is still sky high, which means that all those managers and executives working for oil companies and oil service companies, etc., here are still getting big raises and bonuses.

So unless the price of oil drops significantly, I suspect that at most we'll see a drop in the rate of McMansion conversion in Houston, but not an end. I suspect the number of new McMansions around the country will crash, though.

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