Sunday, October 4, 2009

The Problem with Mini-Mansions

Above: The great American Mini-Mansion. Do you really need all that? Yuk.

UPDATE:  You might want to read this article on homes as investments.  It turns out that buying "more home" means just spending more money.  You don't make a profit by purchasing a larger home, you just spend more money, over time.  Buy the home that is appropriate for your needs, not what some Real Estate Agent says is appropriate for "your income bracket".  And never fall into the trap of "buying as much home as you can afford!" as the events of the last decade have proven the folly of that approach.  A home is a place to live, it is not a bank account!

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I just finished a home remodeling project, finishing off an unfinished basement room. It was an educational experience, and a lot of hard work.

The overall cost of just finishing and furnishing this 14' x 24' room was over $5000. And this included doing all the labor myself, and also buying much of the furniture secondhand.

The cost breakdown was as follows:

2x4, sheet rock, insulation, electrical, construction materials: $500

Paint, trim, finishing materials: $250

Lighting, ceiling fan, etc. $250

Carpeting: $1000

Furniture: $3500

Total (conservative estimate): $5500

I learned several things from this exercise:

1. Just finishing a basic room (not a bath or kitchen, with no cabinets, plumbing, or major electrical) is a staggering amount of labor.

2. The cost of remodeling projects, particularly Do-It-Yourself projects, is a lot higher than you might think. Each trip to the local home-improvement store costs $100 to $300, and it takes many trips to complete even a "simple" project like this (with little plumbing and basic electrical).

3. If you multiply the cost of finishing a room from top to bottom - carpet to draperies to paint, to furnishings, it will run a few thousand dollars for most rooms.

4. If you have a 5-bedroom mini-Mansion with a den, a studio, a family room, an exercise room, etc. the cost of fully and properly finishing and furnishing such a place would be staggering.

5. For reasons 1-4 above, many Mini-mansions are only partially furnished, or if furnished, poorly furnished and finished.

And the conclusion in #5 ends up being true more often than not. During the Real Estate boom of the last decade, middle-class Americans were told to "buy as much house as you can" - and ended up buying houses that were far larger than they really needed.   Being house-poor, they could not afford to properly finish and furnish such houses.

We've been in more than one mini-mansion where entire rooms are vacant of any furnishings, or just used as storage for boxes. Worse yet, we've been to enormous houses where the only furnishings were worn-out sofas and milk crates. The occupants apparently moved directly from the dorm room into the McMansion.

One wants to say, when walking into such a house, "Call the Police! Someone stole all your furniture!" But it turns out the owners choose to live this way.

The cost of properly finishing (i.e., painting or papering rooms beyond "builder white") and furnishing each room in such a house can be staggering - particularly if you have to hire a decorator or contractor or painter or electrician, or all of the above.  As a result, few people take on such a task.

However, purchasing small items on a credit card seems "affordable" as each purchase is "only a few bucks" or a couple of hundred at most. So, rather than invest several thousand dollars on legacy furniture, the McMansion owner has a garage full of cardboard boxes for items bought at "big box" stores - small appliances, exercise equipment, clothing, gifts and tchotchke, and things of that nature.

Owning more house than you need not only means you have to pay more money every month in mortgage payments, property taxes, insurance, and utility bills, it also means you end up with a house you cannot really live in. Many McMansion owners are really just camping out in their investments.

Of course, this is a personal choice for them, and like so many consumer products sold these days, they are sold on emotional needs rather than practical ones. The McMansion is an opportunity to display status and the appearance of wealth. Of course, the key word here is appearance, as many owners are in hoc up to their eyeballs. Moreover, since every other middle-class schmuck on the street has the same house, the idea that such homes convey "status" is questionable.

Moreover, to the trained eye, the cheap construction techniques and fittings are all-too-readily apparent. A large home can be built that will appear "expensive" to the average person, but screams "cheap" to those in the industry. It takes little extra to build a cheap home on a large scale.

In Florida and many areas in the South, expensive looking stucco exteriors can be inexpensively applied using a material called Dry-vit and a small army of migrant laborers. Houses can be made to look expensive without really being expensively made houses. Over time, as the house weathers and fades, the underlying reality of the construction is exposed, and the owner needs to spend more money in continual overhauls to keep it looking new.

Thanks to modern technology, vinyl windows and siding can be installed very inexpensively (and last a long time). Wall-to-wall carpeting is the cheapest floor covering available. The additional amounts of lumber and roofing to build a larger home do not add significantly to the bottom line.

In other words, it doesn't take twice as much money to build twice as much house. There is a basic bottom-line cost to building any home, regardless of size. So ramping up home size is a good way for a contractor to make a lot of money. They can charge twice as much for the home, while increasing their expenses maybe by only 50%. Big sells. Big is profitable. Big works. Or at least it worked.

As we move forward into the new Century, one wonders what will happen to these mini-mansion neighborhoods. In some respects, we are seeing the effects of this in some suburban areas, such as in Washington DC. During the 1990's it was trendy to talk about "edge cities" and the ever expanding exurbs. But just as the middle class housing boom has moved further and further from the city center, it appears that the problems of the city are chasing the suburban dwellers further and further out - to the point where many middle-class and upper-middle-class folks are moving back into the center of cities (or at least the near suburbs), discovering value in these closer-in areas.

We are now seeing suburban ghettos forming in places like Dumfries and Woodbridge Virginia, as the new-home set moves further out to Fredricksburg and the like (or inward to "infill" developments). Suburban sprawl breeds discontent and malaise. Children of wealthy and successful middle-class parents often end up bored and listless - and as a result end up overeducated and underemployed. Suburban crime rates are starting to rival those closer in to the "big city".

Will home buyers still look to places such as "Inlet Cove Mews Estates" as a desirable place to live? Or will these exurban sprawls devolve into far-flung Ghettos, turning into de-facto apartment houses (many already provided with separate "inlaw suites."

People do not need a lot of space to live in. Our parents and our parent's parents raised entire families (often far larger than today's 1.8 child families) in two- or three-bedroom houses. How they did it? We scratch our heads and wonder.

But again, back then, perhaps we were more of an outdoor people - and spent more time in public space. Television watching, creeping up to an average of 5 hours a day per person, consumes more and more time (as does commuting). Each family member, of course, needs their own space to watch their own TeeVee, as no one can agree on one channel to watch. Americans are becoming more sedentary, spending more time indoors and less time outside. So naturally, we are seeing an increase in demand for indoor space.

Of course, one has to wonder if this is one of those chicken-and-egg type situations. Does having more indoor space encourage people to spend more time indoors, or does spending more time indoors encourage people to demand more indoor space? It is an interesting question to ponder.

The bottom line, though, as I noted in my previous post, is that buying more home than you really need is not a smart economic move. A home should be viewed as a place to live, first and foremost, not an "investment vehicle". Buy the amount of home you want or need. So long as it is appropriately sized for the neighborhood, the size will not significantly affect market value. But again, market value should not be the determining factor in home ownership in the first place. The era of home ownership madness is behind us, or at least hopefully it is. After two Real Estate bubbles in 20 years, perhaps people will finally get the point.