Homes As Hummers  Since 1970 the size of the average home has increased 55 percent (to 2,330 square feet), while the size of the average family has decreased 13 percent. Especially among the upper crust, homes have more space and fewer people...In 2005, about 80 percent of the estimated $200 billion of federal housing subsidies consists of tax breaks (mainly deductions for mortgage interest payments and preferential treatment for profits on home sales), reports an Urban Institute study. These tax breaks go heavily to upscale Americans, who are thereby encouraged to buy bigger homes. Federal housing benefits average $8,268 for those with incomes between $200,000 and $500,000, estimates the study; by contrast, they're only $365 for those with incomes of $40,000 to $50,000. It's nutty for government to subsidize bigger homes for the well-to-do.

Homes As Hummers

Another cause of this relentless upsizing is that the government unwisely promotes it. In 2005, about 80 percent of the estimated $200 billion of federal housing subsidies consists of tax breaks (mainly deductions for mortgage interest payments and preferential treatment for profits on home sales), reports an Urban Institute study. These tax breaks go heavily to upscale Americans, who are thereby encouraged to buy bigger homes. Federal housing benefits average $8,268 for those with incomes between $200,000 and $500,000, estimates the study; by contrast, they're only $365 for those with incomes of $40,000 to $50,000. It's nutty for government to subsidize bigger homes for the well-to-do.

But otherwise, why shouldn't Americans buy what they can afford? No good reason. The trouble is that freedom doesn't confer infallibility. With hindsight, some homeowners may regret sinking so much money into ever-grander houses. One possible problem is future operating costs. Homes exceeding 3,500 square feet use about 40 percent more energy than those between 2,000 and 2,500 square feet, says the Energy Information Administration. Suppose electricity or natural gas prices rise because (for example) new power plants or terminals for liquefied natural gas aren't approved.

A harder question is whether bigger homes might lose value. Say what? Gosh, we're in the midst of the greatest real estate boom in U.S. history. Since 2000 home values have risen 55 percent, to nearly $18 trillion, says the Federal Reserve. Americans have borrowed and spent lavishly against rising housing prices. That has kept the U.S. and world economies advancing. Americans increasingly believe that they can't lose by investing more in their homes: They can enjoy themselves and make a pile.

But booms have a habit of imploding. The latest evidence that cheap credit and speculation have artificially inflated home prices comes from a study by the investment bank Credit Suisse First Boston. It finds that home buying is increasingly driven by purchases of investment properties and vacation homes. In 2004 these buyers accounted for 14.5 percent of all home sales, up from an average of 7.5 percent from 1998 to 2002. Cheap credit also abounds. In 2004 almost a fifth of all new mortgages were interest-only loans (requiring no principal repayments in early years), the study finds. Speculative booms usually end when some speculators cash in or when credit tightens.

Even if home prices don't collapse, their long-term performance may disappoint. In a new edition of his book "Irrational Exuberance," Yale economist Robert J. Shiller, who accurately diagnosed the stock "bubble" of the 1990s, examined home prices since 1890. His startling conclusion: After adjusting for inflation, home prices rose only 0.4 percent annually through 2004. After periods when they've outpaced inflation -- say, right after World War II -- home prices slow down. Their recent surge is, by Shiller's figures, unprecedented. The implication is that prices may soon enter a period (after inflation) of stagnation or decline. That would probably preserve big gains for longtime homeowners, though perhaps not for the 22 million who purchased in the past three years.

As Shiller notes, home prices can't rise too much faster than average incomes for too long without excluding many buyers from the market. Among home builders, realtors and economists, the dominant view seems to be that the housing market is basically sound. Younger families and immigrants underpin demand. Some local "bubbles" may pop; elsewhere, price increases may subside. One way or another, Americans might want to reassess whether their passion for ever-bigger homes is good for them and the nation. Do we need to go from SUVs to Hummers? Maybe we should revert to sedans.

http://www.washingtonpost.com/wp-dyn/content/article/2005/07/12/AR2005071201368.html