The Real Deal New York

Appeal of McMansions shrinks nationwide

Townhouse construction is up 25% over the past year as of the second quarter

September 02, 2016 11:50AM
By Kenneth Harney

Builders have begun refocusing their efforts from McMansions to entry-level and more modest sized homes.

Townhouses in Marblehead, Mass.

Goodbye big fat McMansions. Your boom time is over. Hello townhouses and smaller homes — you’re where the action is headed.

Reversing years of ballooning home sizes aimed at upper-bracket buyers, builders have begun refocusing their efforts on entry-level and more modest sized homes. According to new data from the National Association of Home Builders, the median floor area in new-home starts dropped during the second quarter of this year by about 3 percent.

Meanwhile, townhouse construction has been increasing fast — up 25 percent over the past year as of the second quarter. New townhouses, which typically are smaller and cost less than detached single family homes, now account for 13 percent of all single family starts, the highest it’s been since 2008.

NAHB chief economist Rob Dietz told me the quarterly decline is no fluke and the trend is likely to persist. “What you’re seeing is the beginning of builders trying to expand the market” and pull in first-time and other buyers who are frustrated by the lack of affordable alternatives in the resale arena, he said. Many shoppers, especially those with or planning on children, now find growing opportunities in townhouse and entry-level detached-home communities in the suburbs and exurbs compared with closer-in, higher-cost homes.

Some major builders are targeting entry-level buyers and seeing their sales and revenues mushroom. D.R. Horton, which operates in 78 markets across the country from northern Virginia to Washington state says buyer demand for its “Express” line of homes “has been strong and better than anticipated.” Express homes, which come with fewer floor plan choices and option packages compared with Horton’s mid-range and upper-bracket models, accounted for 28 percent of all closed sales and 20 percent of revenues in the second quarter of this year. Home prices average $205,000, ranging from the mid-$100,000s in Texas to the $300,000s and up in California. Models include townhouses and single family detached units.

Other national and regional builders also report growing success aiming at entry-level buyers searching for affordable houses. LGI Homes, active in 21 markets, sells moderate sized new homes averaging just under $200,000. In its most recent quarter, publicly traded LGI says it racked up record sales and revenues. Its first-half 2016 closings were 29 percent higher than the previous year and second quarter revenues jumped by 40 percent.

Further evidence that the trend is shifting away from bigger and unaffordable toward modest and more affordable homes comes in a new statistical study of 101 markets across the country prepared by realty site Trulia. Researchers found that buyers aren’t willing to pay the price premiums they once paid for mega-homes built during the housing boom. Most McMansions are declining in relative resale value compared with smaller, less splashy properties. In Florida markets such as Fort Lauderdale, Miami and Sarasota, for houses built during the boom containing 3,000 to 5,000 square feet — Trulia’s definition of “McMansion” for the purposes of the study — the premiums once commanded by these big homes have shrunk dramatically.

In Miami, a Trulia-defined McMansion cost an average of $902,000 in 2007 compared with an average of $315,000 the same year for a house with less than 3,000 square feet. That’s a premium of 186 percent. Today a differential remains — people continue to pay more for larger homes — but it has shrunk by 83 percent in the past four years.

In San Francisco, according to Trulia data, the McMansion premium is down by 38 percent. In Los Angeles and Boston, it’s down by 25 percent; San Diego by 19 percent; and Oklahoma City by 15 percent. In Washington D.C. the decline has been less precipitous — just 12 percent. In 15 markets out of the 101 studied by Trulia, premiums have moved counter to the national trend: In Buffalo, they’re up by 5.3 percent; in Hartford by 3.6 percent, and on Long Island, where bankers and business barons do their weekend soirees, the relative premium for McMansions has jumped by nearly 10 percent.

Why the general shrinkage in most other markets? Trulia Chief Economist Ralph McLaughlin ascribes it in part to demographic shifts: The two largest groups of active buyers — millennial first-timers and downsizing boomers — can’t afford or have no need for giant homes.

There’s also the aesthetic issue. “Some people hate McMansions,” McLaughlin told me, because of their architectural styles and looming presences.

Then again, he said, “others love them” — though statistically the amount of love they’re willing to shell out for them is on the wane.

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