MaineBiz: Maine homebuyers embrace trend toward smaller homes (April 23, 2012)

By Bob Mentzinger

Add up $4-a-gallon heating oil. Subtract historically low mortgage rates. Divide by the worst housing crash in a century. Multiply by a nervous job market. And what do you get?

In housing, it’s a new frugality, driven by an economically spooked homebuyer with an entirely different set of desires than the ones that fueled the bubble.

Many in Maine’s home building industry say the rank-and-file homebuyer wants newer, smaller homes with energy-efficient heating in locations closer to work with a sane mortgage payment.

“People start thinking differently when their pocketbook is getting hit,” says Tina Lucas, a residential real estate broker in the Portland area who said she’s starting to see “the green factor” show up in Maine’s housing market.

Lucas recalls a recent client who lived in Freeport but wanted to relocate closer to his job in Portland. A married, well-to-do lawyer with two children, he liked the larger spaces of the suburbs and could easily afford to fuel up for the car for the longer commute and the oil tank for the chilly winters. Still, the family exchanged their 3,000-square-foot home for something exactly half that size in Portland.

“They even were asking about geothermal” at their new city abode, Lucas says, referring to high-tech systems that heat homes with water from wells drilled deep into the earth. “People are making a conscious choice to be smaller and more efficient.”

John Lawrence, a broker with Premier Realty in Gardiner, says he’s noticed the same trend in central Maine, where contractors began building homes on spec — generally, an uncommon local practice.

“These are smaller homes, stick-built, on their own land and energy efficient — not ‘green construction’ per se, but propane-fueled radiant heat with hot water baseboards — and they’ve been flying off the shelves,” he says.

Developers don’t risk building speculatively unless there’s a certain market.

One central Maine spec builder, Lawrence says, went out and built four entry-level homes on spec, and “three of his four went under contract before they were even finished.” Lawrence sold one of them, a 1,360-square-foot home, to a single mother with two kids, because, he says, she liked the price, the payment and the projected fuel costs.

“It’s a renewed effort to live within a budget,” he says, calling it “the economics of affordability. Builders are building for a market, and they’re building homes people want and can afford to live in. Those homes are selling.”

But the trend toward smaller, newer, more fuel-efficient homes isn’t yet evidenced in the data, and may have as much to do with tight credit, high unemployment, lack of equity and stricter lending standards than any green revolution.

Home sweet mansion

The average American abode grew 56% in the last 40 years, from 1,600 square feet in the 1970s to more than 2,500 square feet today, according to data from the Multiple Listing Service.

The Great Recession, with its endless glut of unsustainable home purchases fueled by faulty lending, began shrinking the residential footprint in 2007.

From 2007 to 2010, the average size of a new, single-family home in the United States fell from 2,504 square feet to 2,381 square feet, according to U.S. Census data. A survey of prospective homebuyers in 2008 by the National Association of Home Builders found 60% of respondents preferred “smaller houses with more amenities” to “houses with more square footage.”

But between 2010 and 2011, average new, single-family home sizes spiked back to 2,522 square feet — larger than during the height of the boom, according to Census data quoted by the National Association of Home Builders.

The trend in Maine has been similar, where aggregated median home sizes have meandered back to about where they were before the collapse.

Lucas, who also serves as president of the Maine Association of Realtors, says the homes sold in Cumberland County in 2011 were actually about 1% larger by median square footage than they were at the peak in 2007; statewide, they were 3% larger. (See accompanying chart, page 26.)

While the overall numbers may skew larger because large homes are getting even larger, builders say small homes are where the growth is. And they are planning accordingly.

An Architectural Institute of America builders survey in the first quarter of 2012 found only 8% of its builders reporting increased sizes even for new, upper-end home orders, with 40% indicating continued decreases. For entry-level homes, only 5% of builders surveyed by AIA reported increasing sizes; 47% anticipated further declines in size.

“You just have a consumer out there who’s paying more attention to the bottom line when they purchase a house,” Lucas says. “Builders build what the market wants.”

An uneven market

Sally Harvey, who runs Windham-based Home Construction Inc., says the home building story in Maine is “definitely not consistent.” She describes her clientele as “the affluent and sophisticated versus the first-time homebuyer.”

She has low-, middle- and upper-market customers, but sees fewer risks in the “huge” entry-level market, and bigger payoffs at the high end, but bigger headaches as well.

Harvey recently sold a modest, spec-built Colonial home on a 26-by-26 foot footprint that was not yet completed, but which shone with new finishes and modern heating design.

“When they walk in, they’re happy to see they’re getting some amenities such as hardwood and ceramic tile floors at an affordable price,” she says. “For a first-timer to be able to buy new, get nice finishes and have a decent rate, it’s a draw.”

By contrast, she has a middle-market spec house nearing completion in Falmouth that hasn’t seen any action.

At the upper end, go the oceanfront and it’s a builder’s bonanza, where teardowns are the latest trend to hit the Maine coast, in part because of shorefront restrictions that limit homes to an existing footprint.

“So, to get that dream home, that size, people have to go up (in height),” says Larry Duell, who owns Father & Son Builders in Lebanon and serves as president of the Home Builders & Remodelers Association of Maine. “They don’t want to do that on an existing floor plan.

“I’ve seen people spend $60,000 on a foundation,” he says. “The waterfront is a whole different ballgame and always has been.”

Upper-end buyers generally aren’t crimped by credit scores or heating costs. They don’t need to skimp on space either, and as they expand, they take the median square footage of the state higher. There’s also a raft of modern innovations and high-tech gadgets being requested in the newest manses, such as networked controls capable of calling your vacation home on the way there to turn the heat on.

Duell is currently building six new homes: two entry-level, three “move-up” or middle market and one oceanfront. It’s a mix he’s comfortable with, but the middle market concerns him.

“Right now, I will not build a spec house in that middle range. It’s that $300,000 to $500,000 range that’s difficult to move,” he says, stressing that it depends on the community.

Duell says people in the middle are either forgoing amenities to get a size they can afford, or they’re scaling the sizes down so they can get bells and whistles. But not both.

“The move-up buyer, they’re no longer going for the cathedral ceilings, open foyers, oversized tubs. They’re bypassing that,” he says.

Harvey agrees: “The formal dining rooms and formal living rooms, we’re not seeing that like we used to,” she says.

On the other hand, with prices bottoming, interest rates near all-time lows, plenty of inventory and a somewhat stabilized job market, the entry-level buyer is getting motivated.

Harvey says she likes the volumes, but also the ease of the sale at the low end. They’re not as fussy as the higher-end customer, she says, and are grateful to be in the market to begin with.

“It’s a buyer’s market,” Harvey says. “They can haggle; there’s lower rates. People are coming out of the woodwork. And they’re pleasantly surprised they can afford a custom home.”

Turning down the heat

One of the constant refrains among builders, buyers and brokers has nothing to do with bricks and mortar.

“It’s all about heating oil,” Duell says.

Heating is the biggest annual carrying cost for a homeowner in Maine, one of the most oil-dependent states in the nation, where every $1 increase in a gallon of oil sucks $1 billion from the state’s economy, according to the Governor’s Office of Energy Independence and Security.

Because of tighter construction, a homeowner doesn’t have to choose between a massive heating bill or fixing the roof. In the last four years, Duell says he’s seen how home sizes correlate directly with investments in efficiency.

“Remember, anything that increases space, you also have to heat it,” he says. “So, you take someone who’s building a house now, they’re a little smarter. They might take 200 square feet off and instead of the extra square feet, they’d like to put that into insulation or a high-efficiency propane boiler.”

The move toward efficient heating of new homes is validated by data from Efficiency Maine, which helps direct grants and loans for homeowners retrofitting existing homes. Since 2010, Mainers have installed 2,614 new space and water heating units with Efficiency Maine’s help — an average of three conversions per day — saving approximately 2.7 million gallons of heating oil, or $10.5 million at current prices.

But there’s only so much the owner of an existing home can do. Oil furnaces seldom exceed 84% efficiency, according to the U.S. Energy Information Agency. And while homes heated with natural gas can maintain efficiencies in the high 90s, that resource is currently available only in limited areas, though there are plans to change that. Replacing an oil boiler with a natural gas or propane-fired one can run a homeowner about $6,000 or more.

Rules and retirements

In addition to the carrying costs, regulations and demographics may also be playing a role in Maine’s residential downsizing.

Maine isn’t only one of the most oil-dependent states; it’s also one of the oldest, so retirees are a sizeable market.

Duell is currently building a 1,200-square-foot home in Acton for a retired couple.

“Again, that’s small,” Duell says, who sees 1,500 square feet as a baseline size for new construction. “The retirement market is really a move-down market.

“My experience with retirees in the past, they would have 2,200 square feet,” he says. “Now, though, they’re dropping down significantly, to the 1,600-, 1,800-square-foot range.”

Downsizing is a phenomenon well known to R. McAllister Lloyd, owner Creative Cottages, a design-build family firm in Freeport that caters to a space-conscious clientele.

“We find a lot of people are people who are downsizing, (especially) empty nesters,” he says. “When you say tiny to small, the smallest house we’ve ever done is 440 square feet. In Maine, there are a lot of small houses anyway because it’s economical.”

He says he’s seen evidence of downsizing from customers wanting to be under the 1,500-foot threshold cited by Duell.

“It seems to be just where people hit and what can you work with within that footprint,” he says, citing the demand among oldsters for “the master bedroom in first floor as people age, and a possible guest room somewhere.”

Regulations involved with building a home may also work to limit home sizes, especially around waterfront developments, where setbacks and other rules are enforceable by state law or local zoning.

Finally, it’s hard to overstate the psychological impact of the housing bust on everyone in the industry, from bankers to brokers to builders and buyers.

“People want a house they know they can afford,” says Lucas, the Portland broker.

Harvey says her company escaped the housing bust by diversifying its services. The company buys land, offers design services, builds, lists, sells and even finances homes, “all under one roof,” so when the margins on a sale get squeezed, the company can still find profit in the overall assemblage of the property.

Consumers have responded to the challenges of affordability by forsaking ownership and piling into rentals, only recently crawling back into the buyers’ market with an abundant supply of inventory, 30-year fixed rates still dipping below 4% and a sense of stabilized employment. Ultimately, homeowners buy more than a home — they buy security.

Nancy Smith, executive director of GrowSmart Maine, which advocates for redirecting land-use planning toward downtowns and away from rural sprawl, says the move toward smaller homes may just mean that families are choosing to live more simply.

“Single-family subdivisions are still very real, but I don’t see the housing market as strictly cost-driven. Families are choosing to live back in town,” she says. “Some of it is gas prices, but people are also waiting longer to marry, outliving their spouses in some cases, and having fewer children, and so you look at losing that fourth bedroom.

“It’s about having more choices,” she says. “I live on Main Street. I love it. Our kid rides her bike back and forth to school. It’s different than what we all grew up with.”

To read the original version in MaineBiz, click here

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