Small Homes: Future of Real Estate

Michael Tchong

Newtown Community Development Micro Estate
The real estate market is ripe for innovation and disruption. One area where trends are converging to bring about change is home size. Now comes the announcement that the city of Tempe, Ariz. will begin building small homes priced at $138,000 for 600 square feet, aimed at the bottom of the sweet spot we recommend in this trend report.

Work is expected to begin next spring on a community of 12 small homes on city-owned land near downtown Tempe, which the developer, Newtown Community Development Corp., dubs “micro estates.” It’s as if David Crummey, the real estate development manager for Newtown, read our minds, because he notes that “[The idea is] sort of pushing the envelope but not reinventing the wheel.”

Buyers will be able to obtain mortgages, Crummey notes, which smaller “tiny homes” don’t qualify for. We predict that these Newtown homes will sell out in the blink of an eye.

Newtown Micro Estate drawingNewtown Community Development “Micro Estate’ features a new-age loft design in a two-floor layout with a fully functional kitchen, one bedroom, one bathroom, a small living room plus a small back patio. A 900 square-feet building will offer laundry and community space.

The wind is in the sails of the developer. Most notable is the rate of U.S. homeownership, which crept up to 64.2% in Q1 2018, barely higher than Q2 2016’s 62.9%, which was the lowest rate recorded since 1961 when homeownership stood at 62.4%.

Many factors influence this trend. One of them is the discouraging process of buying a home. Based on a survey of 2,000 US adults, 71% consider purchasing a home an overwhelming process starting with house-hunting. That’s followed by the negotiation phase, which requires compromises to close the deal.

More importantly, 37% of homeowners would rather have a smaller house than a larger one, and among baby boomers that number is even more pronounced, 42% say they would prefer to live in a smaller home.

Owners.com, an online brokerage company, reports that 51% would compromise on a cheaper home with maintenance issues that could easily be solved. And 36% said they would settle for a smaller house to save money.

For those not ready to face the home buying ordeal, the only viable option is to rent. Not surprisingly, more U.S. households are renting than at any point in the past 50 years, 36.6% in 2016 says Pew Research.

The most significant demographic segments choosing to rent are young adults, ages 35 and below, and young couples planning to start a family.

These two target markets are prime prospects for small homes. While the concept of “Tiny Houses,” which range in size from 60 to 400 square feet (5.5 to 37 square meters), has captured a lot of attention during the past few years, tiny houses are not practical for most home buyers.

For one, most tiny homes offered for sale are derivatives of mobile homes. They all have wheels despite the fact that 97% of mobile homes are never moved, according to a CBS News report. And while those wheels might suggest a carefree, mobile lifestyle, nothing could be further from the truth.

A recent New York Times story, “Where Can You Park a Tiny Home?,” describes building codes in one town that require the installation of an $18,000 septic system plus payment of an $8,000 “impact fee.”

Then there are logistical challenges of finding readily available water and electrical hookups. Most RV parks, which seem natural places for tiny houses, limit how long you can stay. And tiny house sales pitches frequently gloss over the inadequacy of solar power and the frequent need for replenishing those 50-gallon water tanks.

Although there are attractive cost benefits to owning a tiny house, financing can be a challenge. Because tiny houses are not moored to permanent foundations, traditional mortgage loans are not available.

LightStream, a division of SunTrust Bank, offers RV loans at interest rates ranging from 4.89% to 8.39% for properties that cost between $25,000 and $49,999. Depending on your credit history, payment terms vary from 73 to 84 months. To qualify for an RV loan, a tiny house must be certified by the Recreational Vehicle Industry Association to meet manufacturing and safety requirements proving it’s “roadworthy.”

It’s for all of these stated reasons that small, fixed-property homes, ranging in size from 600 to 1,000 square feet (55 to 93 square meters) represent the sweet spot of the real estate future. This concept has broad implications not just for North America but for the entire globe. Small homes offer most of the cost benefits of tiny houses without any shortfalls.

More importantly, the time has come for Americans to downsize their expectations. And several trends point to a very different real estate future. Many baby boomers are ridding themselves of unnecessary clutter while downsizing. And for many, downsizing is a sheer necessity. Fully half of Americans could not come up with $400 for an emergency.

Budgetary constraints also impact millennials, who are chiefly on the hook for the $1.5 trillion in outstanding student loan debt, a burden further amplified by the more than $1 trillion in U.S. credit card debt.

These financial trends are driving the surging chatter surrounding tiny houses and the growing need for reducing our environmental footprint.

Judging by the most recent home building statistics, the “small is beautiful” message has yet to sink in among mega-home developers. The estimated median, single-family floor area in 2017 is 2,385 square feet (PDF), down slightly from 2,423 square feet in 2016, according to the U.S. Census Bureau. That’s an imperceptible change in a market requiring more disruption.

Also fewer Americans are living in homes these days. In 2017, an average of 2.54 people lived in each American household, down sharply from 3.4 people in 1950.

CBS covered the “new mobile home” in a May 18, 2014, Sunday Morning show, which included a report on a $3 million mobile home that sold in Malibu, Calif. The program noted that there are 8.5 million mobile homes in the U.S. and 97% are never moved.

Sunday Morning featured mobile home designer Jennifer Siegal who believes in a home future that lies at the convergence of an increasing desire, or need, to downsize and rising environmental consciousness.

Siegal is among a growing group of architects and home designers who are sharply attuned to a changing America, including Eugene, Ore.-based architect Nir Pearlson (Pearlson’s 800-square-foot River Road house is shown in the image album below) and San Francisco studio nottoscale, the latter specializing in pre-fab homes, another growing trend.

Even though small homes have less space compared to traditional houses, innovative modular furniture concepts from tiny houses are bound to segue to these kinds of properties, boosting their functionality and style, while maintaining attractive price points.

With the right mix of product delivery by major and upstart home builders, the small home trend is poised for explosive growth. In the next decade, there will be significant upside for homes that range in size from 600 to 1,000 square feet (55 to 93 square meters), costing anywhere from $100,000 to $150,000.

“There will be significant upside for homes that range in size from 600 to 1,000 square feet.”Michael Tchong, Ubercool Innovation

Also needed are innovative solutions to address today’s tiny house obstacles, from lots specially designed for this new type of home, to modified building codes and financing options tailored to this market.To track innovations in this market segment, there are new media, including Small House Bliss and Tiny House Talk.

If you think that small homes necessarily imply spartan living, allow us to dispel that myth with the photo galleries of small-home bliss below (click images to view slideshow).

The question is, when will you be ready to live in a 600-square-foot home? Those loft-like small homes Newtown is planning to build in Tempe will definitely make the transition a lot easier.

Nir Pearlson’s River Road House

  • Nir Pearlson River Road House
  • Nir Pearlson River Road House bedroom
  • Nir Pearlson River Road House kitchen/living room
  • Nir Pearlson River Road House living room/kitchen

Stanford Start.Home

  • Stanford Start.Home 2013
  • Nir Stanford Start.Home office
  • Stanford Start.Home kitchen
  • Stanford Start.Home deck

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Michael Tchong

Michael is a professional trend forecaster and founder of four ahead-of-the-wave startups. He’s also a top-rated innovation and trends speaker, and an adjunct professor of innovation and social media at the University of San Francisco. Follow him by clicking these buttons: