American houses keep getting bigger – and so does debt

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From Mises Wire:

Measuring gains or losses in the standard of living is not a simple matter. We know that over the past century in the United States, working hours have declined, and real incomes have increased. By nearly every measure we can imagine, the standard of living in the United States has increased substantially since the late nineteenth century and early twentieth century. But how have conditions changed over just the past 15 or 25 years? That’s a lot harder to draw conclusions about, and it’s hard to guess if today’s younger adults are going to be “better off” than their parents were at the same age.

There is no single number or metric we can point to that will tell us that “Americans are now X amount better off than they were in 1990.”

Nevertheless, there are various measures we can investigate that can at least give us some insights into how living standards have changed in recent decades.

One of these is “living space.” That is, how much space does each person have in his home for daily activities?

. . .

From 1890 to the housing bust in 2007, average floor space per capita increased significantly from approximately 35 square meters (376 sq. feet) in 1890 to more than 70 square meters (753 sq. feet) in 2007. This was due to both a small increase in the size of housing units over this period, and to a much larger decrease in household size. From 1890 to 2010, the household size was cut in half from more than 5 in the 1890s to approximately 2.5 in recent years.

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. . .

Is Housing Is Unaffordable, Why Do Homes Keep Getting Bigger?

This information all suggests something of a conundrum. We’re often being told that housing is becoming unaffordable, and Americans are too deeply in debt. If that’s the case, though, then why do houses keep getting bigger?

After all, if Americans are getting squeezed on housing, shouldn’t consumers be demanding smaller and more economical living spaces? That is indeed what tends to happen during recessions and immediately following financial crises. We saw it during the Great Depression, we saw it during the recessions of the early 1980s, and we say it in the wake of the 2008 financial crisis.

It’s true that new multifamily production hasn’t returned to its former peak in terms of unit size, but new housing size overall hasn’t even fallen back to 1990s levels. And the 90s wasn’t exactly a period of austerity.

One possible explanation can be found in the fact that Americans are apparently happy to go into debt to avoid having to scale back on square footage. As recent data from the Fed has shown, mortgage debt in America is now only 4 percent below its sizable 2008 peak, and is rapidly heading toward its old peak levels reached right before the financial crisis. Total household debt has climbed to record levels.

Thanks to low, low interest rates, Americans — faced with either buying a smaller house of going into debt — are apparently willing to take on more debt. At the same time, developers continue to build apartment building with larger units — convinced that the new units will find renters. Given relatively low vacancy rates for rental housing in recent quarters, they appear to be right.

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At what point, though, will rising housing costs lead to a real decline in the size of houses and apartments? In 2017, mortgage payments as a percentage of income hit a seven-year high. Data suggests that housing costs proportional to household costs and income has been hitting new highs in various income groups since 2014. Not surprisingly, lower-income households have gotten the worst of this.

But when we look at most renters and homebuyers today, they’re living in larger units than did their parents a generation ago.

There are hints that this trend may be at least temporarily slowing down. The most recent numbers for 2016 show that square footage in new homes went down slightly. And multifamily units are now largely flat in terms of size. It’s possible this points toward the limits of taking on more and more debt. And it may also point toward stagnation in real incomes. Moreover, a new recession would very likely send many people scrambling to economize on housing.

For now, though, it looks like many Americans are still living large when it comes to housing. It’s true that housing costs are increasing — but in many cases, people are paying more for more housing. 



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