New Homes Get Smaller

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Every home is a castle, and with McMansions cropping up in suburban communities everywhere some are on the scale of actual castles. In general though, homes are not growing to castle size, they’re getting smaller.

Well new ones are, that is. In 2006, new homes were the largest ever, an average of 2,268 square feet. In 2009, that was down to 2,100 feet, according to the National Association of Home Builders, citing a review of Census Bureau statistics.

That difference is equivalent to a decent sized 10-by-16 foot room, but the number of bedrooms and baths did not decline, on average. Instead, the smaller floor size appears to be the result of a few nips and tucks here and there.

Home buying is part necessity, part luxury, part fashion statement and part keeping up with the Joneses. But undoubtedly, most buyers address the necessity first, then turn to the other criteria as their budget allows. Even if your budget allows you to buy a McMansion, for example, that may not be the best financial course.

Clearly, the poor economy and aftermath of the recession are the main factors in shrinking home size.

“The current decline in home size can be attributed to factors like the desire to keep energy costs down, the amount of equity in existing homes available to be rolled over into new ones, tighter credit standards, less interest in buying a home as an investment and a growing presence of first-time buyers,” the NAHB says.

A number of luxury options were on the decline, the NAHB found, including three-car garages, fireplaces, patios and decks, though there were more porches.

So how much home does one really need?

Historically, first-time buyers were young people choosing “starter homes,” which generally meant a smaller home suitable for an individual or couple. After a few years, and a child or two, the family would move to a bigger home. As the family built up equity in the home and the parents’ incomes grew, there might be subsequent moves to more expensive homes in better neighborhoods.

But in today’s shaky housing market it might make sense to rethink the process. It could be years before home prices rise significantly, and they could certainly dip more if the economy runs into more trouble. So it’s risky to assume you can break even on a home you’d owned for only three or four years, given closing costs and other expenses involved in buying and selling.

It could pay, therefore, to hold off on buying until you expect to stay put for six or seven years. And if the new home should suit your needs for a longer period, it should have space for children if they are on the horizon.

Even if you are optimistic about the housing market in your area, trading up involves a lot of expenses – realtor’s commission, title insurance, legal fees, appraisals, even a transfer tax in some states. It could make sense to pay a bit more for a home now to avoid the expense and hassles of a move you’d otherwise have to make in a few years.

Of course, thrift is generally a good idea. Two-story foyers are impressive but expensive, and they don’t really make a home more livable. Some amenities like decks, patios and finished basements can be added later.

But adding bedrooms and expanding the kitchen can be very expensive projects that are unlikely to pay for themselves when the home is sold, so it probably makes sense to buy a home that already satisfies your needs in these areas.

As a general rule, the smaller home can be a much better investment over the years. You’ll pay less, shoulder lower interest costs over the years and save on taxes, utilities and maintenance. Those savings can go into other investments, such as stocks and bonds, which tend to perform better than housing.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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