Would You Pay $145,000 for 400 Square Feet?
The quest for affordability pushes boundaries
Ric Edelman: It's Monday, March 11th. On today's show, The Incredible Shrinking House. Go ahead…find a house you can afford if you're young and not making all that much money. You know what you're going to have to do? You're going to have to move way out there. I don't mean into the suburbs, I mean into another state maybe. I know someone in their 30s who's buying his first house currently rents in Rockville, Maryland, a suburb of Washington, DC. Not only can’t he afford to buy a place in DC, he can't afford to buy a place in Rockville either, 20 miles away from DC. He found a house he could afford to buy in West Virginia. He'll have a commute that's more than two hours each way every day. So yeah, moving very far away where land is cheaper is certainly one way you can find a house you can afford. But there's another way too. You can buy an apartment instead. Apartments are usually smaller than single family homes, but we all know that a lot of apartments are pretty darn expensive, depending on their size and location and amenities. And besides, with an apartment, you don't get a backyard for the kids and the dog. Or you can buy a smaller house. Because the cost of houses is directly tied to the size of the house and the lot, the smaller the footprint, the fewer square feet of the house, the less it'll cost, no matter where it is. So exactly how small a house are you willing to live in?
The house I grew up in was about 2400 square feet. It was a split level with four bedrooms, built in 1957, in what was then a new suburban community in South Jersey. It was filled with people who grew up in Philly - my parents - and today, the size of my parent’s house, 2400 square feet, is still the size of the average new home construction in the United States. The problem with affordability is not that houses have gotten bigger and therefore more expensive, it's that houses have simply gotten more expensive without getting bigger. My parents bought their house in 1957 for $19,000, and my dad got a 3% VA loan for 30 years. His mortgage payment was about 80 bucks a month, and he was still paying that 80 bucks a month when I went to college 20 years later in 1976. Today, Zillow says that that house, yeah, it's still there, is worth $527,000. A monthly payment today would be 2500 bucks a month. And that's assuming you make a down payment of 10% of $53,000. How many people in their early 30s do you know could pull off that transaction? $53,000 in cash for a house worth $500,000? Not very many young people could do that. And that's the problem. So, guess how builders are now trying to make their houses more affordable? They're making them smaller, I mean small. Welcome to the world of tiny houses. 400 square feet, a 20 by 20-foot house attached to a 20 by 20 foot garage. These things are popping up all over the country. The typical price, $145,000. Who do they appeal to?
Who would want to buy a house that's 400 square feet? Well, how about divorced people or widows? Empty nesters, young couples? These houses are going up on smaller lots. Two instead of a backyard, there's a side yard. You get a kitchen bar instead of a dining room. Is this really the shape of housing for the future? A home that's not much bigger than your dorm room was? Is this the American dream? When your kids ask you for help buying their first house? Or hey, for you financial advisors, when your clients tell you that they want to help their kids buy their first house, is suggesting that they live in a 400 square foot house something you'd mention? I guess we have to. The idea might be quickly dismissed, or it might be genuinely considered. And if it is, remember this some builders will put that 400 or 500 square foot house anywhere you want, like in Mom or Dad's backyard. Land is one of the biggest parts of the cost of homes. So, if you use land you already have, you really knock down the cost. My point is that we can't assume that we're going to do things in the future the way we did them in the past. What worked for you when you bought your first house, what worked for my dad when he bought his in 1957 isn't necessarily going to work for your kids or your clients’ kids today, so be willing to think imaginatively and consider all options slowly, carefully, and thoughtfully. You just might decide that where you live in the future isn't in a place that in the past, you ever would have imagined. On tomorrow's show, crypto taxation.
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