The Demand for Smaller Houses

Many of the articles I have been reading lately have been extolling the market for smaller houses. After the building boom in McMansions that typified the late 90s and early 00s, all of a sudden the small house looks attractive again. Why? Let's start with the housing crisis. Turn the clock back a year or so - people borrowed huge sums of money with questionable credit. Mortgages companies went out of their way to make sure you could get any house you wanted, in spite of your ability to pay. Why bother with a small house when your mortgage company was more than willing to loan you the money for a big one? This is America right, bigger = better. Many of those ARMs are resetting at higher rates, giving people second and third thoughts. Back to reality, mortgage companies have realized there errors and buyers are finding harder to find mortgage funds. Reason number two, many of these McMansions were built on the undeveloped city fringes where the lots are big. This makes for a long commute. When gas is below $2 a gallon the cost of the long commute was about the opportunity cost of time. When gas hit four dollars, the McMansion looked a lot less attractive. Reason number three is utilities. We tend to focus on gasoline prices because they are posted on every street corner, but heating oil and natural gas prices have skyrocketed as well. The McMansion is big and therefore very expensive to heat. This Businessweek article brings in the retirement of the babyboomers, predicting that many will choose to retire to smaller homes..."As the population ages, smaller homes will be more in demand and many larger homes will be on the market". After all, if your wealth is tied up in home equity, you must sell the home to realize the gains. In order to use the gains, one must buy a less expensive home or move to a more affordable housing market. My prediction: smaller homes will appreciate at a faster rate than McMansions if these trends continue.