AMERICANS DOWNSIZE HOME BUYS

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AMERICANS DOWNSIZE HOME BUYS

• by
• Wendy Koch
• USA Today
• (Detroit Free Press, Sunday Feb. 1, 2009)

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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.

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SUMMARY OF THE ARTICLE (Contd)

• 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

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SUMMARY OF THE ARTICLE (Contd)

• 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.

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SUMMARY OF THE ARTICLE (Contd)

• 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.

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ECONOMICS

• The noted trends in home sizes would appear to
  suggest that densities in the United States
  should stabilize or increase.
• Lets use Mills 2-Parameter Model to determine
  if this is true.

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ECONOMICS ( Contd)

• 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

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ECONOMICS ( Contd)

• Distance Density
• 0 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

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ECONOMICS (Contd)

• Distance Density
• 0 7899
• 1 7172
• 2 6513
• 3 5914
• 4 5370

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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.

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QUESTIONS?