Lead Story…. Much like our waistlines, America’s new houses are expanding. According to the US Census Bureau, the median size of a new single-family house last year was 2,467sf, the largest on record. Many pundits predicted the demise of the much-maligned “McMansion” once the housing crash hit. Clearly that prediction has been less than prescient. According to the Wall Street Journal:
Homes are 61% larger than the median from 40 years earlier and 11% larger than a decade earlier.
One particularly interesting aspect of this trend is that it has been happening while American families are actually getting smaller, not larger. It’s not just the size of new houses either. The components that are going into those new homes are changing as well. More from the WSJ:
“McMansion” may not be a popular term post-housing bust. But American homes have not only been getting larger, they’re also including more bathrooms and amenities such as air conditioning. Some 93% of new houses had air conditioning in 2015 compared with 46% in 1975. About 96% of new homes last year had at least two bathrooms versus 60% four decades earlier.
That may go some way toward explaining rising prices. The median sales price of a new home was $296,400 last year, according to Census, a new high. Even when adjusted for inflation, new-home prices hit a record last year.
First off, the fact that single family homes are getting bigger says as much about increasing land and permitting costs as it does about consumer demand for larger homes – the builders are building what they have to based on the cost of land and other inputs rather than strictly what consumers want. This helps to explain why new home sales have been sluggish coming out of the housing bust. Building a larger, more expensive house is one way to overcome the ever-higher drag of land, permits, impact fees and regulatory costs. Public builder CEOs have been saying this for some time, the latest of which was Lennar’s Stuart Miller who spoke about builders’ inability to produce low-cost new homes at a conference last week:
“This is a tough market condition. We have seen the market recover since the downturn, but the recovery has been slow, steady and in a pretty tight band. When you start with a high land basis [cost] it’s very hard to end up with a purchase price that the first-time buyer finds affordable.”
All that being said, the fact that new homes are now coming with features that entry level houses never had in previous eras does say a lot about consumer demand and points to a simple but oft-overlooked fact: part of the reason that its so difficult to build an entry level home is that what we consider entry level has changed…a lot. Bathrooms and kitchens are by far the most expensive rooms to construct. Believe it or not, there was a time that an entry level home didn’t come complete with a master suite, several bathrooms, quartz kitchen counters and stainless appliances. When you start adding extra bathrooms, higher-finish kitchens, air conditioning, etc costs rise quickly, making it very difficult to produce a home that entry level buyers can afford. More bathrooms and larger homes are not favorable trends if we want more entry level product.
Hold Your Nose: Last week’s jobs report pretty much sucked and is making it substantially less likely that a rate hike is imminent this summer.
Blame Game: Low interest rates are supposed to stimulate the economy by making investment cheaper. Their impact has been muted at best this cycle and the two of the culprits may be dividends and stock buybacks.
Muted Impact: Low oil prices really haven’t provided the economic boost that they were supposed to.
Hitting the Road: Sky high rents have tech firms are looking at markets outside of San Francisco in order to cut costs as VC funding wanes.
Pacman: Today’s must read is a thought-provoking piece from Connor Sen on why housing is about to eat the US economy. Here’s an excerpt of his conclusions but you really ought to read the whole thing (highlights are mine):
-The economic shortfall in the US right now is mostly on the housing side. Because of how important housing is to the US economy, this is why 4.7% headline unemployment doesn’t feel like full employment.
-Construction employment as a share of total employment is likely going to rise at least another 0.4% to get to a level of 5% in this cycle.
-At the current level of employment, this means we need another 550,000-600,000 construction workers.
-Construction unemployment is already near record lows.
-Demographic trends in the US – an aging workforce, a workforce that’s growing more educated, the changing mix of immigration towards Asian knowledge workers rather than Hispanic blue collar workers (29% of construction workers are Hispanic) – all act as headwinds towards finding more construction workers.
-From a labor slack standpoint, the pool of potential construction workers is probably well-represented by unemployed men under the age of 55. To get back to late ‘90s levels of male unemployment (from a level standpoint, not an unemployment % standpoint), we would need essentially every single male unemployed worker who finds a job in the coming years to go into construction. This doesn’t take into account skill, desire, education level, geography, etc.
If we had to find 500,000 construction workers tomorrow, from a math standpoint it would be impossible. The slack isn’t there. But this isn’t the way things work in the real world. Time and market forces allow for adjustments. So here’s what that means:
-Over time, as construction employers become more aggressive they will bid away workers from similar fields – agriculture, oil & mining extraction, manufacturing. New entrants to goods-producing fields will be drawn overwhelming to construction, so as workers quit or retire from agriculture/oil/manufacturing-related industries it will create increasing scarcities in those industries.
-Goods-producing/blue collar workers will increasingly bleed from the Midwest/Northeast to the faster-growing southeast and west coast, where increasing numbers of construction jobs will be. This will put more and more of a strain on Midwest/Northeast goods-producing firms.
-With construction-friendly immigration flows not being what they were, the globalization solution will be to move ever more numbers of agricultural/manufacturing activity overseas to free up their domestic workers for construction. Neither California farm owners nor Midwest voters and governments will be happy about this.
-Construction wages/costs going up will mean higher housing/real estate costs for households and firms, leaving less of a spending pie available for the rest of the economy. If you’re spending an extra 3% of your pay on housing that’s taking business from a grocery store or a movie theater or Amazon.
-Capital will flow increasingly towards the housing sector, starving other sectors of capital. If construction can’t achieve productivity gains then labor shortages in other sectors (agriculture, manufacturing, entry level services/fast food) will mean more and more incentives to automate labor-intensive tasks to free up those workers to work in construction.
“Software eating the world” implied that digital upstarts were going to create low cost solutions to take demand away from older, high cost analog firms. Amazon eating big box stores, Facebook eating print and TV. Demand was going to shift. “Housing eating the US economy” implies that housing is going to steal your inputs. They’re coming for your workers and capital on the supply side. It’s a different dynamic but a similar outcome – housing is poised to reassert itself as the main driver of the US economy.
Enhanced Sale: Homes listed at $100MM have been languishing on the market of late. However, The Playboy Mansion, which had a listing price of $200MM was just purchased by Heff’s next door neighbor, a 32 year old financier who was involved in buying Hostess Brands out of bankruptcy when the Twinkie maker went belly up a few years back.
Survival of the Fittest: It may seem hard to believe today but Google+ was viewed as an existential threat to Facebook when it launched in 2011. Here’s the inside story of Mark Zuckerberg’s war to crush Google+ that sent Facebook on it’s current trajectory of web dominance.
@Trouble: Snapchat has now overtaken Twitter when it comes to average daily users. See Also: Twitter has a major anonymous troll problem that’s holding it back and the solution comes with a huge price: a dramatic drop in daily users.
Rosetta Stone: theSkimm put together a list of acronyms so you can figure out what the hell your kids are actually talking about.
Chart of the Day
Houses are growing while households are shrinking.
Video of the Day: This parking lot brawl in the parking lot of a Canadian Costco is quite possibly the least Canadian thing I’ve ever seen, eh.
Subtle: A Chinese highway services company has started striping it’s parking lots with spaces specifically for women. The spaces are 1.5x the size of a normal spot, framed in pink and market by an icon representing a skirt-wearing woman. When pressed for a comment, the highway service company district manager responded:
“The bigger parking spaces are for women drivers whose driving skills are not superb,” Pan Tietong, the service area’s manager, told the newspaper. He said he had encountered female drivers who were unskilled at backing up into spots, and sometimes asked security guards to help them park.
The spots “are especially designed for women drivers,” he said. “It’s a humane measure.”
As much as I’d like to comment further on this “humane measure,” I’m going to refrain primarily because I have no interest in sleeping on the couch tonight.
Thin Crust Alimony Pizza: An Italian court ruled that alimony can be paid in pizza because Italy is awesome.
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