The Big American Dream (Part 1)

A recent Forbes article talks about "the American dream of home ownership."  Housingwire.com asserts that "most view becoming a homeowner as...a chance to put down roots and fulfill the American Dream."  Whitehouse.gov dedicates an entire blog post to how Obama is "Promoting the American Dream of Homeownership."

So when did the American Dream become all about home ownership?  The whole concept must have shifted over the decades.  It used to be about things like freedom, and opportunity, and equality.  Yeah, I know there was never an exact definition.  But I also know that when I was a boy, back in the seventies, it had nothing to do with home ownership.  (Although, I seem to recall it had a lot to do with Farrah Fawcett.)
 

Enough ranting.  (For now.)  Let's just assume we accept this annoying American Dream = Home Ownership idea.  Forbes is concerned.  Obama is concerned.  And if you are a home buyer, you also might be concerned because the American Dream is becoming unaffordable and everyone is pressuring you to "get into the market" before you are completely priced out.

There seems to be ample justification for this concern.  The graph below contains two lines indexed to their 1973 value.  The green line represents the median household income, adjusted for inflation.  The orange line represents the average new home price, also adjusted for inflation.  Alarming, the two lines diverge.  Gobs.  By 2013, the green line (income) is only 6% higher than it was in 1973.  But the orange line (new home price) is a whopping 56% higher!
 

So for home buyers, keeping the dream alive is getting really tough.  Mortgages are eating up more and more income, leaving less for retirement savings.  And college funds.  Maybe even food, heat and health.  The financial stress even affects relationships.  (The top cause of divorce in this country?  Money conflicts.)

Do we resign ourselves to the stress, or is there a way out? 

There's a way out.  In the graph above, I have added one more line.  The black line shows how new homes have grown in size over the years, indexed to the value in 1973.  The median new home constructed that year was 1,525 square feet.  By 2013, new homes had grown to 2,470 square feet.  That's an expansion of over 60%!

Granted, the average American also expanded a lot over those same years...  Seriously, the average adult male grew from 173 pounds to 196 pounds.  So one might argue that bigger people justify the need for more space.  However, offsetting the weight gain argument is the fact that over the same time period, the average household size dropped from 3.0 persons to 2.5 persons.  (Wait.  Wait.  Does that suggest...Are people eating each other!?)

You'll notice that the black line tracks the orange line remarkably well.  Prices are more volatile, as one would expect, but both lines move up and to the right with the same overall slope.  So what does all this mean?  It means that the steep price of home ownership, the elevated stress level, and the concern over the American Dream are all largely just because we want bigger homes!

So the way out of this mess is simple - make do with less.  Our parents did a perfectly fine job raising us in 1,500 square foot homes.  Your grandparents raised your parents in even smaller quarters - in 1950, new homes were a mere 983 square feet.  You don't need 2,500 square feet.  Heck, some of you don't need 4,000 square feet.  Save yourself a lot of stress and a lot of money by buying something cute and cozy.

"I got you now, Deadwood.  You keep talking square footage.  But there are many other factors to consider here.  Things like location, lot size, tax breaks, investment potential and leverage."

Don't worry, I'll cover those things in future posts.  (And unfortunately, I guess I'll have to cover this disturbing new cannibalism trend, too.)  However, even when I do, even considering all those complicating and confounding factors, the core message remains the same for home owners seeking early retirement.

Big.  Is.  Bad.

* 20 million posters sold.