Whither the McMansion? Why Millennials Aren’t Buying

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Wharton’s Benjamin Keys and Dowell Myers from the University of Southern California discuss the market for McMansions and factors influencing millennial home buying.

The end of so-called “McMansions” has been predicted several times over the years, but those large, mass-produced houses that the baby boomer generation (born 1946-1964) favored as a status symbol kept coming back. Now, baby boomers are entering their 70s and 80s and many are looking to downsize, but they are finding it hard to offload these large homes, facing a paucity of buyers among the millennial generation (born 1982-2000), who are unable to pay the prices they want.

For anxious sellers, however, respite could be around the corner as mortgage interest rates ease, and the millennial generation becomes qualified for more and bigger loans, experts say.

Wharton real estate professor Benjamin Keys said owners of McMansions display what economists call “nominal loss aversion” – that is, they don’t want to sell their homes for less than what they invested in them, including the costs of mortgage financing and updates.

However, the difference between what those homeowners had invested and the current price is not necessarily an accurate reflection of losses, said Keys, who is also a faculty research fellow with the National Bureau of Economic Research. “You have lived in the house for a long time, and you got something out of it in terms of consuming it instead of paying rent,” he explained.

Dowell Myers, professor of policy, planning and demography at the University of Southern California’s Price School of Public Policy, said baby boomers are facing a “big generational housing bubble.” Baby boomers and the generation before them collectively account for about 46 million owner-occupied homes that are worth an estimated $13.5 trillion, according to a 2018 Fannie Mae report by Myers titled, The Coming Exodus of Older Homeowners.

Keys and Myers explored the factors behind low demand for McMansions and what’s ahead for the real estate market on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.) Below are key takeaways from their discussion.

“For the houses that don’t fit the families, the prices are going to have to fall.” –Benjamin Keys

Multiple Disconnects

A big problem for the McMansion market is the mismatch between where millennials prefer to live and where those large houses have been built. The younger generation gravitates to cities – where their jobs are — whereas baby boomers have built their homes in suburban locations.

The market for those large homes is soft also because the baby boomers have “over-built their homes, and then they over-prettify them with their own personal amenities,” Myers said.

According to Keys, research shows that the median house size has increased by some 1,000 square feet over the past 50 years. At the same time, the average size of the household has fallen as people have fewer kids than in earlier generations, he noted. “For the houses that don’t fit the families, the prices are going to have to fall.” Added Myers: “The millennials seem to have a taste for living more sparsely. They don’t want as much furniture. They don’t want as much space.”

The quality of school districts has also been a strong factor in determining housing demand and prices, but many McMansion owners have overlooked that factor and built in locations without strong schools, Myers added.

Signs of Revival

In recent years, millennials have been driving increases in home buying, and eventually some of that could rub off on McMansion sales, Keys said. Millennials nowadays are facing fewer barriers to purchasing mortgages, such as low incomes or difficulties in holding on to the “long-term employment relationships” that lenders prefer, he added.

“The millennials are coming alive,” said Myers. “It’s like a guided missile coming up.” The demand gap is starting to ease a little as millennials get into their mid-thirties, have stable jobs, decide to get married and want to start having kids — and then realize that maybe the city isn’t the best place for them. McMansions that are in good school districts could attract young families, Myers said.

Keys wondered if the housing preferences of the younger generation have truly changed or if there is only a “delay” in the demand for McMansions. Those homes may not be desirable to people in their late 20s but instead to people in their late 30s or 40s, he noted.

Housing mortgage financing has also become more affordable in recent weeks, which also should help lift home sales, Keys said. According to last week’s Freddie Mac Primary Mortgage Survey, mortgage interest rates were at 4.08% for a 30-year fixed-rate mortgage.

Restrictions on Development

Even as millennials are showing increasing demand for homes, they may not find them in the urban locations they prefer. While the easiest place to build is on the edge of the city on a greenfield, where land is relatively inexpensive, millennials want to live in cities, where there is political resistance to home construction, said Myers.

“The millennials are coming alive. It’s like a guided missile coming up.” –Dowell Myers

A big factor there is resistance from existing homeowners to new development. They pressure local governments to impose minimum lot sizes and restrictions on building heights, or bring “excessive control” over construction projects with local aldermen or city council members who may have veto power over any development in their district, Keys noted. “This is a classic NIMBY (Not In My Backyard) challenge that’s tough to overcome when you have a local and very entrenched group of people with significant self interest in the outcome.”

Myers cited a thesis advanced by Dartmouth College economics professor William A. Fischel on so-called “homevoters,” whose local political behavior focused on preventing development that might devalue their homes. “All the voters are aiming at protecting their house values,” Myers said. “Individually, our self-interest is to maintain and restrict supply, drive prices up and get rich while everybody else begs for a house. The problem is that all the voters already have houses, and the people don’t have a house don’t get to vote. This is a structural problem we haven’t solved yet.”

Waiting for Immigrant Demand

Immigrants could step up and fill the demand gap for McMansions, as they seem to favor bigger houses for “multigenerational living,” and they also are fanning out into the suburbs, said Myers. But that inflow “is being stymied now,” he added, alluding to the recent trend of tighter immigration policies. “In the past, that has been a big share of the growth in homeowner demand, but now it has leveled off.”

Housing demand from immigrants has been “a big savior” in high-priced markets like the San Francisco Bay Area, said Myers. “Chinese and Indian immigrants in particular seem to be able to bring the capital to buy those houses and put cash in native-born home sellers’ pockets.”

Chinese investment in the U.S. housing market has driven price growth of between 8% and 12% since 2012 in select zip codes, according to a research paper Keys is working on. However, the Trump administration’s restraints on trade with China are now dampening Chinese investments in U.S. real estate.

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