Years ago, I was talking to a man -- call him "Randy" -- who made his money selling mortgages. First, Randy's company originated them -- lent money to residential buyers so they could purchase their dream homes. Then he sold them to a consolidator who pooled many mortgages and used them as collateral for the issuance of securities. The difference between this man's behavior and the behaviors that led -- in large part -- to the crash of 2008 was that Randy took a moderately long view of his business. He enforced reasonable underwriting standards, so there was a high likelihood that the homebuyers he dealt with would be able to pay off their loans and end up owning those houses outright or selling them in the normal order of things. No big balloon payments. No negative amortization. No huge scheduled increases in the monthly amount due. No "liar's loans". No "idiot's loans". If he wrote you a mortgage, Randy did it in what seemed to all involved a reasonable expectation that you would be able to fulfill its terms and that, thus, investors would see a continuing stream of income.
Which isn't to say that Randy was engaged in a sustainable form of business. It wasn't as blatantly unsustainable as what followed, but it couldn't last. He knew it couldn't last, and so he got his and then he got out. His moderately conservative underwriting and his business ethic was in service to a goal of profit maximization and -- because his business was in no one's eyes anywhere near too big to be allowed to fail -- profit maximization meant maintaining a record of good product (loans to borrowers who, at a very high rate, kept up the payments) at least until he decided to pack it in.
But pack it in, he knew he would. Not that Randy didn't enjoy his work, but he knew that the mortgage business would stay hot only as long as the residential construction/sales business stayed hot. And he knew that couldn't continue forever, because houses were getting too big. See, the reality of housing is that utility decreases to scale. And luxury. And price. Having a place to sleep out of the weather is of phenomenal value -- consider the alternative. And having a place to keep your stuff safe has value. As does having a place to cook, and to eat. And to ... ummm ... eliminate.
But once the necessities are taken care of, the marginal value of more housing -- in a rational world -- decreases. Sure, it's nice to have enough bedrooms. It's nice (but hardly necessary for most folks) to have a guest bedroom. But what's the real value of a second guest bedroom? A third? And it's nice to have a living room or a family room or a TV room, but do you need all three? A formal dining room can be impressive, but how often do most families actually use it? And what's the logic of having more bathrooms than the house has occupants?
Yet at the time of our conversation, Randy pointed out that the average new home on which he wrote a mortgage fell into a couple of those categories. One, and often two spare bedrooms. A formal living room and an informal family room and, often, a TV ("media") room besides. A formal dining room and an eat-in kitchen. As many full baths as occupants (often one to spare), and a couple of half-baths as well. A two-story foyer with lots of fancy windows, through which no one would ever look out. At least 3000 square feet of finished space. A lot size anywhere from a quarter acre to five acres, almost all of it in grass. Fences which served decorative purposes only. Garages to hold three, four, even five cars.
The way Randy put it was simple: America is the most over-housed country on the face of the planet. We're putting too much of our money, and our time, and our effort into housing. Housing is fundamentally a non-productive investment. The myth is that you can get rich by living in your own home. Folks believe that myth because they think they'll be able to sell their house for more money than they paid for it. But the real value of the house won't go up, so what they really believe is that some 'greater fool' is going to come along. It can't last.
Of course, it didn't (although lots of folks want to believe that the good times will return, and maybe they're right -- for a while). But because Randy saw it coming, he made his mortgages, made his money, and retired early (about 10 years ago, well in advance of the crash).
Now back in the day, Randy was working the upper third of a booming market. The houses on which he wrote mortgages weren't median American homes in any sense. Still, the trends that he observed apply to the market as a whole. And his observation about America being overhoused doesn't just apply to new home buyers. Because new homes become less-new homes and eventually older homes, the effects of decades of increasing home size have rippled through the national housing stock. The last numbers I saw, the average American single-family house was somewhere between 1600 and 1800 square feet. The average new house was over 2800.
To put that in comparison, a typical 1960-vintage ranch house is 960 square feet. Two- and three-bedroom houses in most developed countries are under 1000. A typical urban frame house built in the first half of the 20th century runs between 800 and 1100. And, back then, families were larger. My grandmother was one of twelve children; the family farmhouse had about 1800 square feet. My wife's grandparents raised five children in a home of under 1000. As it happens, the average US household size is decreasing as the average American house gets bigger. Go figure.
Household sizes may be decreasing of their own volition (do sizes have volition?), but the increase in house sizes didn't just happen. It was planned. And plotted. And platted. And sold. Lots of industries benefit when houses get bigger, and when people move out of perfectly good housing to get into those McMansions. Builders benefit. Bankers benefit. Appliance and furniture makers and sellers benefit. Car companies benefit, because "bigger" generally means "farther out". Oil companies benefit on the same basis. Retailers of any sort of durable and non-disposable consumer good benefit. (Folks "need" more stuff to fill all that space.) Electric utilities benefit.
Towns and counties seem to think they benefit, but they don't. Local governments compete for "development", apparently not knowing (or not caring) that developed residential land -- in most parts of the country -- demands more in services than it pays in taxes. By contrast, agricultural land -- in most parts of the country -- pays more in taxes (even at a much-reduced rate) than it demands in services. Farmland doesn't typically require a whole lot of police protection. Or fire protection. Or educational services. Or sewer services. Or -- proportional to its area -- road maintenance. Residential land requires all those and more, and then avoids paying the full bill.
Part of the reason that the marginal services most residential development demands are expensive is that the development -- the housing -- is spread out. An extensive system of roads is an expensive system of roads. Or sewers. Or fire departments. Costs of some municipal services -- police protection, education -- are only minimally affected by residential density, but many are. As densities increase, many municipal services can be delivered more efficiently. Of course, many private services (retail, health care, entertainment) can be delivered more efficiently as well. And some private services (transportation, most obviously) can be replaced by public or public/private alternatives at an even greater increase in overall efficiency.
All this, of course, has implications for housing sizes. It's not practical (I'm not sure it's even possible) to build high-density housing where the average unit has 2800 square feet. But the truth of the matter is that most folks who live in large houses don't use most of that space on a regular basis, anyway. They pay for it, and they pay to heat/cool it, and they pay taxes on it, but they get little or no utility from most of it. They, and American society as a whole, would be better off if the average household occupied less space.
Of course, to get folks in this country to occupy less space, first you have to get them to want less space. And, after decades spent getting them to want more space, that's not going to be an easy sell. It's going to take planning. And plotting. And marketing of a revised American Dream. To a smarter consumer. Sounds like (at least initially) an educational project to me.