Are New Homes Mostly "Luxury"? Does it Matter if They Are?

Are newly constructed American houses, condos, and apartments too fancy? Too big? Too amenity-laden? Too...what's the word... Shall we say...”luxurious”?

Ah yes, the "L" word: "luxury," the preferred punching bag of a thousand participants in shouty arguments about housing on social media. Housing researcher, former New York City planner, and Strong Towns member and frequent contributor Nolan Gray was featured in The Atlantic earlier in April, where Gray decided to poke the bear with a provocative thesis:

"America Needs More Luxury Housing, Not Less"

The title is a bit of deliberate trolling, but the article is serious and substantive. Gray's counterintuitive, but basically correct, point is that we need a lot more homes, and that in the grand scheme of things, it doesn't matter whom they're built for nearly as much as we think it does.

At the same time, in making his basically correct argument, he (mostly) elides a question that I think is out there about how the kinds of homes we build have changed—and not necessarily for the better. Houses and residential lots really are much bigger than they used to be. New apartment buildings do have more amenities than they used to. A lot of us end up consuming more house than we really need or would benefit from, often for lack of alternatives. As a society, we are misallocating resources into high-end housing that would be better spent elsewhere—not because of developer or homebuyer greed, but because a set of regulatory and financial incentives have made the low end either illegal or all but impossible to build profitably.

But first, let's be clear about where Nolan Gray's lightning-rod Atlantic article is unequivocally right. There are two elements to Gray's thesis that are crucial for anyone to understand:

Point 1: "Luxury" housing benefits even those not in the market for it (the Musical Chairs hypothesis).

I wrote in 2018 about the basic error committed by most people who invoke the specter of "luxury housing.” That error is to assume that "luxury" is a fixed property of the home itself. In reality, it's a property of the market, and mostly of the value the market ascribes to a desirable location. If you don't believe me, imagine you could teleport a $2 million San Francisco Victorian house into East Baltimore. What do you think it would sell for?

One of the best analogies for the housing market I've ever seen is still the "Cruel Musical Chairs" game illustrated by the Sightline Institute in a viral video explainer. Imagine homes are chairs, and everyone who wants a home is playing Musical Chairs—only in this game, the way you score a chair is by paying for it, and each chair goes to the highest bidder in order of their buying power/willingness to pay.

The simplest implication of this analogy is that if you add a bunch of really luxurious chairs—say, nice comfy recliners—to the game, all else equal, you've simply improved the average quality of a chair that any given player gets to sit in. Nobody is made worse off. The only way anyone's access to a chair gets worse over time is if new people enter the game at a faster rate than new chairs, which is exactly what has been happening in America's priciest housing markets. (San Mateo County, California, home to YouTube and Facebook, added only 1 housing unit for every 19 new jobs between the years of 2012 and 2017.)

There is a ton of complexity that this metaphor doesn't capture, but the core of the Musical Chairs argument is borne out by some real-world research. Studies from the Upjohn Institute have used change-of-address records to track migration chains, asking the following question: When someone moves into a new apartment or house, who moves into the home they vacated? Who moves into the home that person vacated? And so on.

Effectively, the Upjohn studies demonstrate the musical chairs game being played in real time, and they find that the construction of new housing most often makes nearby homes more affordable, not less. The mechanism for this is by freeing up housing units that are often quite affordable for lower-income residents, just a few "chairs" down the line.

(A little aside here: One popular countervailing theory is that this doesn't work in real life, because wealthy investors will just hoard empty housing units they have no intention of living in—the equivalent of one player occupying multiple chairs in a round of musical chairs by placing signs on empty chairs that say "Reserved." In practice, however, there is little evidence that this occurs on any truly large scale. Most homes by far are inhabited, and vacancy rates are generally quite low in high-cost cities. It’s true that investors do own large quantities of housing: we discussed on a recent podcast the alarmingly fast-growing phenomenon of large investment funds buying up homes en masse. However, these are almost always rented out to tenants to live in, so they're not really pertinent to our discussion of keeping chairs out of the game altogether.)

Point 2: "Luxury" is often just marketing gloss.

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Literally nothing about this sign is true. (Photo by Daniel Herriges, taken in October 2020.)

Gray points out that every developer has the motive to shamelessly label their own product "luxury," and most do. (See the accompanying photo of renovated no-frills apartments built in 1975.) The word is more of an empty marketing term than anything objective. Meanwhile, it’s also an equally empty pejorative when used to oppose new housing, as evidenced, maybe more than anything, by the phenomenon in which the owner-occupiers of $2 million single-family homes sneer at "luxury" condos selling for $500,000. "Luxury" here is a signifier meant to carry implications about social class, lifestyle, and insider/outsider status.

This doesn't mean that the homes people are calling "luxury" are cheap. They're not! But this is less a function of their physical characteristics than the scarcity of housing in high-demand locations. Take a tour of your average new "luxury apartment" building in 2021, and you'll find...fairly normal* apartments with normal* features, that just happen to be new, and that are expensive because they're brand new and in a neighborhood where real estate is at a premium.

There's an asterisk up there next to “normal” for a reason.

But new homes really have gotten more luxurious. And that’s not necessarily a good thing.

The other side to this story, though, is that the definition of a "normal" new home really has changed dramatically over the past few decades. It's true that new "luxury" apartments in 2021 mostly aren't luxurious by current standards, and certainly are rarely luxurious by the standards of new single-family homes in 2021. But it's also true that 2021 standards are pretty luxurious by, say, 1971 standards. And it merits a debate on why that is, and whether or not it's good.

It's more common than not for larger new-construction apartment buildings today to  have things like concierge service, pools, fitness rooms, game rooms, dog runs, etc. One site even recommends that a developer consider whether their "resident profile" warrants adding a virtual golf simulator.

As for single-family homes, square footage has crept up and up and up over the years (on average, by about 1,000 square feet since 1973, a near-doubling of living space per person). This has happened through the addition of extra, special-purpose rooms to the floor plan, the evolution from no garage to garage to three-car garage, and the general super-sizing of floor plans. It's reached the point where a lot of the trendy discourse about "tiny houses" refers to things that our grandparents would have just called a "house."

Actually luxury housing. (Photo via PxHere.)

Anything a previous generation would have recognized as a "starter home" is now an endangered species, except where you can still afford to buy one that was built during that previous generation. According to the Intelligencer:

"With opportunities for development limited by restrictive zoning, builders have favored large, luxury homes that can be sold at a higher margin. In 2020, just 65,000 new homes were smaller than 1,400 square feet; in the late 1970s, 400,000 such homes were built annually."

Construction costs scale roughly linearly with the size of a house: in fact, builders estimate them on a per square foot basis. The ballooning of home size goes a long way toward helping explain the overall increase in housing costs over the past 40 years, as these graphs show—price per square foot has not increased all that much at all.

It’s also true that the median detached house today comes with not just more house, but more land. Although median lot sizes are ticking back down since the 1990s, residential lots remain much larger than they once were. The very small urban lots of the prewar development pattern are almost nonexistent in contemporary suburbs, though they’re staging a comeback in a few cities such as Houston.

The devil’s advocate will say, “Hey, maybe this is trend is good. After all, surely there was a time when a ‘luxury’ home was just one that had more than one bedroom, or one that had indoor plumbing. Why should we object to living standards increasing?”

However, quantity of consumption is hardly the same thing as quality of life. And even if you want to argue that 3,000 square foot houses with big yards, or apartments with a pool and a fitness room, represent a significant jump in quality of life over 1,500 square foot houses in more compact communities, using the neighborhood public pool and jogging in the park (I’m highly skeptical), the toll taken on American life by a dearth of more modest options on the menu is evident. Middle and low-income renters leave places like California in droves. Many younger Americans have all but given up on homeownership, especially in major cities of the West Coast and Northeast. There are many places where the median salary can’t come close to buying the median home.

To blame simple developer greed for this phenomenon doesn’t pass the sniff test. It would require believing that an entire industry is choosing to ignore tens of millions of potential customers that someone could profitably develop and market a product for: people who would love a new home at a moderate price point but can’t afford a “luxury” one.

Rather, a range of perverse incentives have conspired to drive up the "floor" on what a home can be over the years. There’s no one answer to the question of who or what is to blame for high housing costs.

Regulatory factors are a big part of the answer. Most U.S. cities mandate that people consume more land than they might like to, by enforcing minimum lot sizes. Apartment buildings are often subject to density limits, which in practice pushes developers to build fewer large apartments rather than a greater number of small ones. And most cities mandate that homeowners and renters pay for off-street parking they may not plan to use—particularly a problem for apartment buildings, where parking can inflate the monthly rent by hundreds of dollars.

These trends aren’t market-driven. (See evidence—from none other than Nolan Gray, newly of Atlantic fame—that minimum lot sizes distort development decisions, and evidence from Boston that residential parking requirements are excessive.) They’re cases where more modest forms of housing common in older neighborhoods, such as homes on small lots with only on-street parking, are literally illegal to build in almost all areas.

Some of the trend toward “luxury” features is likely indirectly driven by these mandates as well. If the cheapest home you can legally build is already guaranteed to be out of reach of a lower-income buyer, then you are going to adjust your marketing and amenities to the more well-heeled buyer who is now your target audience.

Zooming out a bit, another factor appears, likely the biggest of all. Quite simply, as Alan Durning of the Sightline Institute puts it, “The problem with U.S. housing policy is that it’s not about housing. It’s about real estate.” The linked article is a more thorough rundown than I could ever give here of the ways in which U.S. federal housing policy has long been designed to make real estate an attractive and reliable investment. We lavish property owners with tax incentives and subsidies. Is it any surprise that people respond to things like the Mortgage Interest Tax Deduction—a subsidy which overwhelmingly benefits the wealthiest homeowners and which dwarfs all federal subsidy for low-income renters combined—by buying more house, and sinking more of their net worth into housing? As Durning puts it:

Tax breaks and hidden loan subsidies encourage speculation in home values. They cause buyers to put more money into their homes and less into other, productivity-enhancing investments…. It also exacerbates inequality. Because the tax breaks are much more valuable to households in high tax brackets, they skew the housing market away from first-time and entry-level buyers, who are mostly in lower tax brackets.

There are reasons Americans have come to buy bigger and bigger houses, and apartment builders have come to build fancier and fancier buildings, over time. But those reasons are not nearly so much about our quest for a more luxurious lifestyle as they are about the inducements for homeowners and Wall Street alike to treat the housing market as an ATM.

More building is good. But that doesn’t mean we should cheer “luxury” homes.

I don’t fundamentally have a disagreement with Nolan Gray’s Atlantic article, insofar as its thesis is that building more homes is good for everybody in the housing market, even when the newest homes serve predominantly the top end of the market. I agree with that thesis. I think it’s important for anyone who cares about affordability to understand that their cause is not served by opposing “luxury” housing or trying to block its construction. All that road leads to is fewer chairs in the Cruel Musical Chairs game that we’re all stuck playing, where the losers at the very bottom of the market end up homeless (or in mold-ridden, dilapidated, yet still overpriced apartments).

Luxury builders didn’t cause the current status quo of super-sized houses and over-the-top apartment amenities. And yelling at them won’t get us out of it. They’re responding to the incentives before them. If you want to move the mouse, you have to move the cheese. We do this by reforming housing finance, legalizing and rolling out the red carpet for large amounts of small-scale, inexpensive development.

But I nonetheless have to stop short of outright celebrating that new apartment complex with the golf simulator, and you’re certainly not going to see me cheering the new starter mansion with the 3,000-car garage. Yes, every one of these built frees up more modest existing housing for someone who needs it. But we’re still building an awful lot of stuff that I can’t see as anything but a tremendous misallocation of resources, away from productive investment and into bloated real estate. And this comes at the cost of other ways we could invest in the quality of our communities: for example, in things like a top-notch public realm. Something that might actually diminish our appetite for gated, privatized “amenities,” or homes we’re never supposed to want to leave, in the first place.

(Cover photo via Flickr. Creative Commons license.)

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