For Housing Values, Is Bigger Better?

Original Post: http://online.wsj.com/article/SB10001424052748703597804576194772974777088.html?mod=WSJ_RealEstate_LeftTopNews

By JUNE FLETCHER


Q. I have been thinking about downsizing my home to save money. But I'm wondering if that's smart from an investment standpoint. Will a smaller house hold its value as well as a larger one?

--Montclair, N.J.

A. If the small house is in the same general vicinity as the larger one, probably not. That's because, all other things being equal, people will almost always equate size with status. Moreover, as the effects of the economic downturn linger on, spare bedrooms become more critical as unemployed adult children move back into the family home, perhaps joined by grandparents whose 401(k)s have shrunk.

In fact, the downturn already seems to have hurt the value of smaller homes relative to larger ones. Leesburg, Va., economic consultant Tom Lawler pointed out in his March 10 market commentary that "as has been the case since at least the end of last year's homebuyer tax credit, the prices of smaller homes showed more weakness than the prices of larger homes."

Smaller homes also start out at a relative disadvantage to larger ones because they often cost more per square foot. That's because every house needs certain high-ticket items, like a heating, air conditioning and ventilation system, at least one bathroom and a kitchen. As a house gets bigger, the incremental cost for these pricey items lessens.

However, when it comes to value, size isn't the only consideration. Shape matters too. Because a single-story house requires a bigger roof and foundation than a multistory one with the same square footage, it usually will cost more per square foot. The quality of materials, height of walls, level of trim, number and shape of windows and difficulty of construction all factor in, too. So it's possible for a jewel-box rambler with coffered or vaulted ceilings, bow or bay windows, top-of-the-line kitchen and tumbled marble floors to be more expensive than a big boxy Colonial nearby with only builder-grade fixtures and finishes.

And, of course, many external factors also impact the value of a home, including lot size; the age of the community and its amenities, like neighborhood tennis courts and swimming pools; views; proximity to urban attractions and public transportation; and even landscaping.

How important all of these things is largely a matter of personal taste, as well as what stage you've reached in life. So don't get too hung up on cost-per-square-foot comparisons. Let your lifestyle and your budget dictate the type of home you live in.

However, if you only are considering new homes, keep in mind that they are expected to shrink in the near future, as builders scramble to compete with cheap foreclosures. A recent survey of 238 builders and designers by the National Association of Home Builders showed that 74% expect new homes to be smaller by 2015, with homes averaging 2,152 square feet or about 10% less than those built in 2010.

Write to June Fletcher at fletcher.june@gmail.com