McMansion economics

Economists have had a field day analyzing the excesses of the recent housing boom, from the blistering pace of loan originations to the dizzying levels of leverage assumed by everyone in the market. But surprisingly little attention has been focused on another element that fueled the bubble: the supersizing of the typical American home.

Sprawling developments lined with rows of McMansions have come under fire from environmentalists and urban planners. But they also deserve to be scrutinized from a purely economic perspective. Oversized homes stretched many homeowners beyond their means, not only in the purchase costs but in home maintenance costs as well. Downsizing might free up vast amounts of disposable income that could be better channeled toward, say, education and healthier lifestyles.

Consider the following: According to the Census Bureau, the average new home sold in the U.S. ballooned in size over the last three decades from 1,700 square feet to 2,422. That’s a 42% increase, with the trend intensifying since the late 1990s. And clearly our love affair with McMansions had nothing to do with making room for more kids. During the same three decades that houses grew so dramatically, the average size of the American household fell from 2.76 people per household in 1980 to 2.57 per household in 2009.

The change in home size seems more related to taste. In the last decade, middle-class homebuyers no longer seemed content with the humble bungalows that suited their parents. Grand entryways, spacious master suites, extra bedrooms, multiple bathrooms, media rooms, play rooms — families fell in love with the sheer luxury of these suburban homes on steroids.

What if today’s homes returned to the size expected by the typical U.S. homebuyer 30 years ago? The average new home would have been 722 square feet smaller in 2009. If you consider the average cost per square foot, returning to the expectations of our parents’ generation would have produced a savings of about $80,000 per home in 2009 alone. America’s total expenditures on all new homes sold over the last 30 years would have been $1.2 trillion less in today’s dollars, and that savings would continue to accrue in the future. That’s before taking into account the cost of furnishing, heating, cooling and cleaning all that extra space.

Today, Americans devote a whopping 34% of their household expenditures to their homes. But if Americans are willing to rethink their assumptions about what their houses should be, we could radically improve the lives of those who live in those homes.

If the size — and relative expense — of the average American home had not grown so substantially over the last three decades, the money saved could have been put to more productive uses. Obviously some families would simply use that savings to boost other types of consumption (and that’s not necessarily a bad thing when viewed purely as an economic stimulus, or when you consider how much consumer spending was fueled by credit cards in recent years). Others might have avoided the heavy mortgage debt that is dragging them down today. But at least part of that investment could have been redirected to much more valuable uses, some of which have implications for society as a whole.

Roads, railways and runways are important, but the real stimulus to sustainable economic growth is building human capital. If families downsize and redirect a greater portion of their income to education (or to cultural enrichment or to cover the cost of a healthier lifestyle), the benefits they realize can be lasting.

If they’re willing to forgo some of that expensive elbow room, parents might free up the resources to put themselves and especially their children on the path to more successful careers and higher quality lives in the future, minus the crushing burden of student loans that so many college graduates face today.

This shift could also go a long way toward making the U.S. workforce more competitive. Indeed, Nobel laureate James J. Heckman and Dimitriy V. Masterov of the University of Chicago have sounded an alarm that America is falling behind on this front, noting that “both the quality and quantity of the labor force are not keeping pace with the demands of the skill-based economy.” That’s an equation that has to change as innovation and knowledge workers become ever more prized in the global marketplace.

It’s worth noting that China, which is on an upward trajectory, already devotes a larger share of household expenditures to education and health than the United States.

We’re not, of course, suggesting that we unleash an army of bulldozers to level America’s mansions. It will take time to change people’s habits. Remember the Hummer? Four years ago, 71,524 of the giant vehicles were sold in the United States. But consumers came to realize that they were expensive and costly to operate and therefore downsized to smaller and more economical vehicles. Sales plummeted by nearly 90% in the next several years, and GM finally dumped the model.

Similarly, if consumers start buying smaller homes, home builders will build fewer big ones. Indeed, the American Institute of Architects reports that the downsizing of homes is already occurring, as people find they can’t afford (or realize they no longer need) home theaters, fitness rooms, game centers and extra wings for guests. The shift to smaller homes will clearly take more time than the shift to smaller vehicles, but both shifts lead to the same outcome: more money in the pockets of Americans to focus on things much more valuable to their families and the country.

Best of all, this reallocation of resources is purely voluntary. It doesn’t require government subsidies or add to the national debt. It only involves individuals rethinking their needs versus their wants — and fully comprehending the size of the opportunity costs stashed away in their extra bedrooms.

James R. Barth is the senior finance fellow at the Santa Monica-based Milken Institute, where Tong Li and Rick Palacios Jr. are economists.