Perhaps the new sign of fully recovered economy should be a McMansion? Or maybe our economy would be better judged by the size of the middle class?

In 2010, while we were still trying to figure out what went wrong with the federal stimulus and which bank was to blame for it all (answer: none of them, or all of them, or just Bear Stearns, depending on your perspective), Time wrote a piece on Aug. 20 entitled “The End of a Housing Era: McMansions Losing Their Luster.” The brief article starts with this interesting bit:

“New research delves into a harsh reality — with tough economic times in the background, large residences are no longer a given.”

I am pretty sure that large residences were never really a “given.” Still, let’s move on:

“’s 2010 American Dream survey notes that from 1950 to 2004, the average size of an American home jumped from from 983 square feet to 2,349 square feet.

But according a July 2010 Trulia-Harris interactive survey, that figure is poised to drop for the first time in six decades. Among individuals polled, only nine percent were looking in the McMansion range: a house covering at least 3,000 square feet, built in proximity to other palaces. In contrast, 64 percent of those polled were looking for dream homes of 800-2,600 square feet.”

Now, 800 to 2,600 square feet is by no means a small range, and even at the low end, 800 square feet is a far cry from a trendy “tiny home.” But, houses were getting smaller, Time said, and the economy wasn’t nearly as forgiving as it was in 2004.

But in a piece in the New York Times this weekend entitled “McMansions Are Making a Comeback,” we see the sprawling suburban home holding fast to the ropes, giving it the old college try, and truly pulling off a Rocky-esque revival.

“When the housing bubble burst in 2007, there was a glut of unsold inventory on the market, and the size of newly built homes began to shrink. In both 2008 and 2009, Census Bureau figures show, the median size of a new home was smaller than it had been the previous year. It seemed that after more than a decade of swelling domiciles, the McMansion era was over. But that conclusion may have been premature.

In 2010, homes starting growing again. By last year, the size of the median new single-family home hit a record high of 2,306 square feet, surpassing the peak of 2007. And new homes have been getting more expensive, too. The median price reached $279,300 in April this year, or about 6 percent higher than the pre-recession peak of $262,600, set in March 2007. The numbers are not adjusted for inflation.”

But how are people buying these homes, if the economy is, as the article in the NYT claims, “weak”? NAHB’s Rose Quint says that people who can get a loan, an altogether evaporating pool of Americans, are fueling the numbers behind home sales.

“People who are less affluent and have less robust employment histories have been shut out of the new home market. As a result, the characteristics of new homes are being skewed to people who can obtain credit and put down large down payments, typically wealthier buyers.”

So, what do you glean from all this? Is it that the economy is recovering and housing is reaching a natural equilibrium? Or is it that the size of homes skews toward the wealthy, which means fewer people are able to buy homes due to a shrinking middle class?


Economists were pleasantly surprised last week after a glowing jobs report that has lead to surging 30- and 15-year fixed mortgage rates. The 30-year fixed rate is up from 4.17 percent to 4.41 percent, and the 15-year fixed rate is up to 3.41 percent from 3.38. That’s the word from Zillow’s Mortgage Marketplace, at least:

“Rates surged on Friday after a stronger-than-expected jobs report and upward revisions to prior months’ unemployment levels,” said Erin Lantz, director of Zillow Mortgage Marketplace. “This week, rate movement will depend on whether Wednesday’s release of the Federal Open Market Committee meeting minutes and Fed Chairman Ben Bernanke’s speech reinforce or depress market expectations of a September start of easing federal stimulus.”

So, are we officially in recovery mode after two years of ridiculously low, economy stimulating interest rates? I think so. What’s your verdict? Are we getting back on our feet?

Home Equity Economy

Don’t get me wrong, I am thrilled to see Case-Schiller reporting double-digit annual growth across all composites in their latest report. The 10- and 20-city composites showed gains of 10.3 and 10.9 percent through the year ending in March 2013.

For the Dallas area Home Price Level Index, the year-over-year growth according to Case-Schiller’s indicies was a very healthy 7.94 (117.02 in 3/12 and 124.96 in 3/13). So yes, we’re experiencing growth, but why is our total economic recovery so slow?

Mark Dotzour, chief economis at the Real Estate Center at Texas A&M University, explains it this way:

We are witnessing a recovery in the housing market. Housing prices are increasing, and new residential construction is picking up. The increase in home prices has a positive effect on economic activity in two ways.

First, an increase in housing prices gives way to investment in new housing construction. Second, the “housing wealth effect” is magnified as an increase in residential prices causes some households to increase their expenditures on home improvement, consumption or both. But to do so, they must first get a loan from a financial institution. This is extremely difficult to achieve under current borrowing constraints and behavioral biases.

As discussed earlier, households have been deleveraging from high debt levels as they attempt to manage debt. Conditions are tight; banks are not willing to lend easily. Uncertainty about job retention and professional growth is another factor that lowers the probability households will increase their debt burden.

Dotzour goes on to add that homeowners with less-than-stellar credit are less likely to capitalize from the recovery of the housing market. It’s those homeowners who have pristine credit, high levels of equity, and very little debt who are able to make money from the process of selling their home.

So what amounts to a full economic recovery? Well, it’s bigger than the housing market, Dotzour says. Sure, a sharp decline in the housing market can tank the economy, but home prices and construction alone won’t revive it.

If household debt decreases and technological gains increase, then employment increases, and, therefore, household income rebounds, Dotzour adds. So while it’s good to be optimistic about the housing market, our economic recovery is still waiting in the wings.