Tuesday, December 30, 2008

Pattern Recognition # 7 - Smaller, Greener Houses

Yesterday I saw a fascinating article about how they are building more fuel efficient homes in Germany. They are built with more insulation, double windows, excellent weatherproofing, and they cost little to keep at comfortable temperatures. One noteworthy feature. They are built as 1500 square feet or 2000 feet, based on a calculation of 500 square feet per person. They are heated by passive solar energy and have the most advanced ventilation and air filter systems.

In the U.S. in 1950, the average house was 1000 square feet, by 1970, 1500 square feet, by 2006, it was 2500 square feet, and all during this time, the average American family was getting smaller. Today, many affluent American people have houses that range from 10,000 square feet to 30,000 square feet. Not only is that a lot of space to decorate and clean, but a lot of space to heat and cool.

All of this is interesting not only because of the green aspect of how much resources and energy it takes to live comfortably, but also a skewed sense of priorities also contributed to the current financial scandals in the mortgage and banking industries.

Not being a real estate professional, the significance of certain facts escaped me. For example, when I lived in Atlanta, I saw neighborhoods of sturdily built brick apartment buildings with plenty of greenery and trees in between torn down to make way for townhouses or condos sporting price tags "from the low 250s." It would be common to see one old house with a nice sized yard torn down to make way for a cul-de-sac with half a dozen McMansions squeezed in.

I used to live in those apartments that were torn down for a very reasonable rent, so I wondered how much the mortgage would be on those new places. I figured that I would need to get married and we would both need to be making a really good income, and both paying the mortgage in order to afford to live in the same neighborhood now.

When I looked around Colorado I saw similar patterns. All the home builders it seemed, wanted to be in the business of building really upscale neighborhoods. I can understand that desire and that reasoning. And I also know that there are lots more people making modest incomes than fabulous incomes.

So maybe that was one of the reasons lots of those crazy mortgage plans were born. Real estate agents had lots of inventory of quarter million dollar homes and half million dollar home and up to sell, but everybody was not making enough income to afford them. So the books were cooked and people who just had average incomes were placed in mansions. Perhaps if more home builders were building modest homes more people would have been able to afford them without all the screwy financing deals. That would have made the profit margins more modest, but then again, that would have followed a different plan. The push for bigger houses was about looking for a higher margin on each unit. Profits are good, of course. We are all in business to make money.

The valuable lesson from the pattern is this. More modest sales, but a greater quantity of them, produces a steady stream of profits over time. Putting more big ones on the market is a crapshoot. It could mean bigger profits, but that is only if there are enough customers who can afford them and want them. Now, of course, we have seen that the crapshoot did not pay off. Not only are there not profits because there were not enough customers for the products, but the foreclosures are making it harder for other people too. Less people are able to afford the bigger houses, plus the glut of foreclosures has driven down the value of the houses of people who did not have any problem affording what they bought.

Maybe the Germans have a better idea. Build greener, smaller, more affordable houses and all those people making modest incomes will be able to afford to live in them. That is what happened in the housing boom in the U.S. following WWII. Modest houses that everyone could afford were the main focus. Of course, luxury homes were build too, but there were many more houses that were affordable to anyone who had a decent paying steady job.

The lesson from the pattern can be this. Smaller, greener houses can work for everyone.

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