AMERICANS DOWNSIZE HOME BUYS

by

Wendy Koch

USA Today

(Detroit Free Press, Sunday Feb. 1, 2009)

SUMMARY OF THE ARTICLE

• Article referred to information developed by Mr. Gopal Abluwalia, the director of research for the National Association of Home Builders.

• Data reviewed suggests that the American dream of owning a home, due to economic and social shifts, is shrinking in size.

• The trend towards new homes with larger square footage, which was evident beginning in 1978, has abruptly slowed and is now reversing itself.

SUMMARY OF THE ARTICLE (Cont’d)

Ave. Sq. Ft. of New

Year Single-Family Homes

1978 1,750

2007 2,479

2008 (2nd Qtr.) 2,629

2008 (3rd Qtr.) 2,438

SUMMARY OF THE ARTICLE (Cont’d)

• While there were larger temporary drops in square footage during earlier periods, the latest drop was considered much steeper and is believed will hold even after the economy recovers.

• The author then discussed the results of a survey of builders performed earlier this month by Mr. Kermit Baker, the chief economist of the American Institute of Architects, which reported that 89% of respondents are building or planning to build smaller homes.

SUMMARY OF THE ARTICLE (Cont’d)

• This shift towards smaller-sized homes is believed to have been confirmed by resent sales figures.

• Homes priced less than $150,000 were 41% of existing sales in November of 2008, compared with just 36% in November of 2007.

• The author concluded her article noting that as the economy weakens there is less incentive to buy a bigger more expensive home. Not only are larger homes more riskier investments they are also more costly to maintain.

ECONOMICS

• The noted trends in home sizes would appear to suggest that densities in the United States should stabilize or increase.

• Let’s use Mills’ 2-Parameter Model to determine if this is true.

ke

k

N

kN

1

1)(

ECONOMICS ( Cont’d)

• Under the circumstances suggested by the authors, it would appear that N(k) would increase over time. This would make the percentage of usable land (i.e., one less the ratio of N(k) to N) lower, thereby increasing density.

• Recall from the basic information contained in the Mills’ spreadsheet, the results were:

ECONOMICS ( Cont’d)

Distance Density0 7843

1 7124

2 6471

3 5878

4 5340

Assuming a ½ of 1% increase in N(k) from1,000,000 to 1,005,000, the density changes would be:

ECONOMICS (Cont’d)

Distance Density0 7899

1 7172

2 6513

3 5914

4 5370

CONCLUSIONS

• While I considered using the rent functions to analyze the changes noted in this article, I found use of the density function to be more interesting.

• Even though it is difficult to estimate just what exactly will happen to density if the noted trend continues, it is hard to imagine the trend of lower density continuing under the current economic circumstances.

QUESTIONS?