Reason No. 7 to hate the McMansion ordinance.

The McMansion ordinance will (likely) redistribute wealth from small lot owners to large lot owners.

This is the reason I first turned against the McMansion ordinance.  I haven't put it last for this reason, but because I admit it is still just a conjecture.  I think I've got good reasons for believing it to be true, but markets are dynamic and complicated things.  Maybe it won't pan out this way.  I hope hard sales figures eventually will give us a clear-cut answer.

Enough disclaimers.

Small lots are worth more if you can build big houses on them, assuming there's ample demand for big houses. The McMansion ordinance will keep small lot owners from getting top dollar.  On the other hand, it almost certainly will benefit large lot owners.  There will be fewer lots where it is possible to build the big houses the market demands, making them more scarce and thus more valuable.

This wouldn't necessarily be true in a real estate market where the supply of large lots equals the demand for big houses.  But that balance does not hold in central Austin's market, where small lots increasingly have been used as big home sites.  In other words, a McMansion ordinance matters only in a market where people are building McMansions.

The McMansion phenomenon is a result of the large spread between home prices and construction costs, combined with the relatively low value that buyers put on large yards.   

Let's consider a concrete example.  Suppose large homes in a given central Austin neighborhood are selling for $250 per square foot but cost just $100 per square foot to build.   Let's say we've got a small lot with a 1,000 square foot cottage on it.  What's it worth?

One way to calculate its value is to multiply the square footage by the going market rate for houses that size.  Small houses usually fetch a higher price per square foot than large houses, so let's say $275 per square foot.  Valued this way, the house is worth $275,000.

But suppose that with no McMansion ordinance, the lot could accommodate a 3,000 square foot house that still fetches the market rate.  That house would have a market value of $750,000.  Subtract $300,000 in construction costs and $25,000 in demolition costs, and the lot is now worth $425,000.  Because owners (or at least their realtors) are good at figuring out the value of their property, that's what the owner will ask.

Enter the McMansion ordinance.  The owner (or his developer customers) can now build just a 2,300 square foot house on the lot.  The new house will be worth $575,000.  It will cost $230,000 to build and $25,000 to demolish the cottage.  The net lot value is now $320,000, still significantly more than the cottage is worth on a per square foot basis, but a full $105,000 less than the lot's value without the McMansion ordinance.  (Many of the small properties in central neighborhoods are valued according to some sort of analysis like this; that's the only way to explain their $300 or $350 per square foot asking prices.)

In this scenario, the McMansion ordinance has cost the small lot owner over $100,000 in equity.  Although that's less than a third of the house's value, it's likely the bulk of the owner's equity.

While I think these numbers are roughly representative, they're not drawn from a real example.  Maybe construction costs per square foot should be higher, maybe sales price per square feet lower.  This does illustrate the hypothetical impact of the McMansion ordinance.

Note that the McMansion ordinance might have an adverse impact even if the value of small lots continues to rise (due to, say, increasing demand from singles and DINKS). The impact in this case will be reflected in a slower rate of growth for small lot prices, at least compared to the rate of growth for large lot prices.  That is, the small lots will be worth less than they otherwise would.

I've seen three arguments against this conjecture.  (Feel free to contribute others.) 

This can't be true because the value of small homes continues to go up.  For the reasons stated above, I don't think that proves anything -- it's relative growth that is relevant -- although it might make us feel less sorry for the small lot owners.

Small homes will be worth more if there is a regulatory guarantee that they won't be surrounded by McMansions.  This is probably true.  But I don't think a small lot with such a guarantee will be worth more than if you could build a big house on it.  For instance, if the example above is realistic (debatable, I admit), you'd have to believe that a "no-McMansion" guarantee will add $105,000 to the small lot's value.  Unlikely.

Small lots will be worth more if we preserve neighborhood character.  I've got two responses to this.  First, you'd again have to believe that neighborhood character is worth a bunch of money.  I think most of the value in central Austin homes is due to their proximity to central Austin amenities rather than "neighborhood character."  I don't believe neighborhood character will have that much price effect.  Second, even if it does, the McMansion ordinance does not really preserve neighborhood character.  For all its effort to regulate design and taste, we'll still see tear-downs and new, hulking houses.  Just not as many as before.  The McMansion ordinance was poorly drawn to regulate neighborhood character (which will make it seem more arbitrary when it does affect design or taste). 

So in the end, I think the McMansion ordinance will make small lot owners worse off than they'd otherwise be and large lot owners better off.  That has never seemed very fair to me, even if the value of small lots continues to rise.

I suppose I'd feel differently if most small lot owners supported this ordinance.  We don't know whether they did or not.  Some certainly did.  And some certainly opposed it.  Because the Task Force was not selected or structured to represent their interests, however, I don't think they got a fair shake.

Comments

[edward]

One of the many ironies of the McMansion ordinance, is that ultimately, following the law of supply and demand, the McMansion ordinance actually *rewards* the very people with the houses that inspired the ordinance to begin with. People that want space for a family or value non cookie cutter architecture and want to live central will be forced to choose from the now static supply of housing that meet these criteria.

[AC]

Addendum: I should have listed the sources for my example.

$250/square foot is realistic for several parts of town, including Tarrytown and Enfield. Bouldin, Hyde Park, and Travis Heights are closing in on these prices. See the figures helpfully collected at http://www.escapesomewhere.com/realestate_austinhousevalues.html.

The $100/square foot estimate for construction cost is based on data collected by R.S. Means & Co. Means breaks data down for four categories of houses: economy, average, custom, and luxury. According to Means, a 2-story, 3,000 sq. ft. "average" house costs $72.60/sq. ft. (wood siding) to $82.95 (masonry). The same house in the custom category costs between $87.10 and $98.20. I think my $100/sq. ft. number is conservative.

Even if you go up to a 3-story luxury with stone siding (virtually the most expensive category), you're only at $120/sq. ft. or so. Using $120/sq. ft. in the above example would make the lot worth $365,000 without the McMansion ordinance and $274,000 with the McMansion ordinance, or a $91,000 decrease, rather than a $104,000 decrease using the $100/sq. ft. estimate. (But the difference would likely be greater, since cost per square foot goes down as the house size goes up.)

[Pookmail.]

"Small lots are worth more if you can build big houses on them ..."

This assumes that the market places a premium on properties that maximize indoor space (which, unfortunately, is a good assumption).

If a house covers most of the lot, then the property as a whole has little outside space. For me, that property would have limited value, and it certainly wouldn't be worth what people are trying to get for their lot-filling McMansions.

Who wants to spend all their time indoors, or have to leave their property just to get outside?

Maybe I'm out of sync with "the market", but I think the real problem is that "the market" needs to spend more time outside.

[M1EK]

Pookmail,

Your theories on property value are interesting. Have you tried sharing them in the context of actual urban development, say, in a real city, where land is very very very very very expensive?

[Pookmail]

No, because that's not my point. The fact that people want to spend all their time indoors and that this is what's ultimately driving the real-estate market is a symptom of a much, much larger problem.

In the end, the issues surrounding McMansions, building ordinances, zoning, and urban development policies are irrelevant, and in fact are just annoying distractions from the actual problem.

The real problem is urbanization itself. We've lost touch with the land. The tide turned for the worse when we collectively migrated from rural areas to the city. Industrialization and urbanization will be our downfall.

I'm not here to tell anyone how to live their lives, nor to advocate against the free market. I believe very strongly in the free market. But my opinion is that the way we're collectively evolving our socioeconomic milieus is unhealthy and wrong.

[M1EK]

Pookmail,

The average resident of Manhattan would be very interested to know they're spending all their time indoors.