The FHA loan limit dooms McMansions in California

McMansions are no longer affordable or easily financeable in California, so builders will likely build fewer of them.


Urban planners and environmentalists advocate high-density development near transit hubs. They entreat us to screeds outlining the demerits of McMansions, and extoll the virtues of walking in urban cores. Unfortunately, much to their chagrin, the buying public disagrees with them.

Builders provide what buyers in the market demand. Visionaries may wish demand were different, and some want to force the market to bend to their wishes, but for most of the last 70 years, the buying public demanded a detached single-family house on a large lot. This may be about to change.

Buyers preferences won’t change. Despite the concerted efforts of urban planners and environmentalists to change consumer behavior, people still want what they want: large, detached single-family homes. However, desire is not necessarily a house or die

Economists measure demand, not by emotional desire, but by the willingness and ability of a buyer to put money toward a purchase. The willingness to buy McMansions on large lots still exists, but due to the changing landscape of mortgage finance, potential buyers lack the ability to buy what they want. Therefore, buyers substitute to what they can afford – which is going to be smaller, higher density housing in California going forward.

The FHA loan limit is to blame

I recently wrote about what’s going on with the FHA loan limits in California. In that post I detailed the down payment barrier the FHA loan limit creates. I followed that post with a discussion on where the building and investment opportunities are today. Due to the FHA loan limit, detached single-family home construction will be pushed to the fringes, and in markets closer to employment centers, builders and developers will respond with higher density in order to build and sell products under the FHA loan limit.

superadequacyI recently spoke with a land developer in Lake Elsinore that sold two parcels to production homebuilders. The sales were from the same project with the only difference being the size of the lots. The finished lot values of the 6,000 SF lots was only $2,000 greater than the finished lot values of the 5,000 SF lots. Given the 20% drop in yield, the 6,000 SF lots produced a much lower per-acre residual land value than the 5,000 SF lots produced.

Given these circumstances, it shouldn’t be surprising to find that more small lots and even some detached products are scheduled to come to market in 2017. This same response is notable across most markets in California.

The “invisible hand” of market forces in response to the FHA loan limit will accomplish what years of urban planner and environmental propaganda could not. Demand will shift away from detached housing in all but the fringe markets where land is still inexpensive enough to build this product for less than the FHA loan limit. Everywhere else, which is most of California, smaller detached and attached products will rule the day.

The McMansion is doomed in California. Rest in Peace.