When I was small, I’d often sit beside my small table in my room and work my imagination playing with Legos. Beside my Legos, my book shelves were stacked with my favorite stories. As I got older my room remained the same size, but I wanted to fit more stuff inside it. Many of my friends had CD collections, video collections, stamp collections, baseball cards, musical instruments and TVs with video games. I used to imagine what it would be like if I had all this stuff until I realized that it wouldn’t fit in my room.
Long ago, storage costs were high. Suppose you had obtained a large CD collection after years of buying, trading and searching and wanted to keep it safe. You could store your collection in a bank vault (expensive and more difficult to casually admire) or store the collection in your home. If you chose to store them at home, then the desired size of your collection is related to the desired size of your home.
In the last 50 years, storage costs have declined dramatically. Komorowski (2014) assembled some data on the subject described it in the chart below.
A single gigabyte can hold roughly 250 songs or 12 CDs worth of music. Suppose you were a die hard music fan and owned 650 albums. To store 650 albums, you’d need 55 gigabytes of storage. In 1995, that collection would have cost $55,000 to store digitally, today it cost a mere $5.00.
Keep in mind that storing 650 albums requires a shelf this large.
As the cost of storing a large variety of our property has collapsed (both in terms of size costs and dollar costs), I would have guessed that newer homes might be smaller, but this does not seem to be the case.
The data suggest that new homes seem to be getting larger, family size continues to shrink and the cost of space adjusted for inflation seems stable. If people are having fewer kids and need less space to store their stuff (much can be digitized), it is not clear why they would want to purchase larger homes?
The data above begs the question, why do people continue to buy larger homes? A Reddit thread on the subject provides some hints.
From Reddit user PRguyHere:
My wife and I recently bought a house. We only NEED two bedrooms (us plus our toddler), but the house we bought has four bedrooms. Why?
- Guest bedroom. We live hours from our families, and we want them to be able to visit their granddaughter without paying for a hotel.
- The possibility that we'll have additional kids in the future. We're buying a house because we're done moving. I don't want to have to turn around and buy another house if we decide to have another kid in a year or two.
Starting from the top, this user wants to secure guest bedroom space and is willing to pay for two extra bedrooms to allow his family to stay in his home rather than a hotel. Depending on the frequency with which this occurs it might be a good trade. However, the rise of Airbnb is likely to drive down the cost of renting space to a very low level. Outlaying a large amount of capital to secure something that is going to be much cheaper in the future sounds like a bad trade.
He’s also thinking about his home size as a way to raise additional children because the costs of moving are too high. In this sense, people may end up overconsuming space should the couple not have additional children. This statement also highlights the costs of moving. Given the high switching costs, people may be unwilling to trade and continue to live in suboptimal situations.
His last comment is the weakest. As storage costs continue to fall, this argument will continue to get weaker.
Another user ShutUpHeExplained:
It's a value store. You invest your money in a large house and you get to write off the interest. You can often sell it later for 50% over initial cost and adjusted for inflation and costs over time, you still make good money.
I agree that size is one component of price but it is not the most important or even third most important. There are three rules of real estate which take precedence over size, namely:
Rule 1. Location
Rule 2: Location
Rule 3: Location
I suspect that over the next 30 years, housing demand in the US will shift towards smaller homes in urban areas, given further reductions in family size, lower storage costs and reduced price of short term rental (through Airbnb) in desirable locations. I suspect those paying large prices for large homes in non-core areas are going to be disappointed when they go to the market as home sellers because their grandchildren will be playing with Lego in virtual reality.