How Do New McMansions Affect The Value of Neighboring Homes?

How Do New McMansions Affect The Value of Neighboring Homes?

By Terri Cullen From The Wall Street Journal Online

Our neighborhood is changing. A number of homes are undergoing major renovations that will double their sizes, and new homes are being built that are much larger than existing homes in the community. Our three-bedroom, one-and-a-half bath, 2,400-sq.-ft. home, once among the largest in the neighborhood, will soon be among the smallest.

The building boom has given Gerry and me pause. What impact is the sudden McMansioning of our neighborhood going to have on the value of our home? And will the super-sizing of nearby homes have any affect on our neighborhood's culture? Is it cause for concern, or are we just jealous?

The building boom began across the street early in the spring. Our neighbor started an addition, doubling the size of his home. Then another home, one of the smallest in our neighborhood -- a tiny two-bedroom, situated on a 100 ft. by 100 ft. lot -- was purchased for $285,000 and quickly razed by a building company. A three story, five-bedroom "castle" is taking its place -- complete with spire. As summer began, our next-door neighbors' contractor began adding a third floor to their home. Up the block, three large five-bedroom homes have sprung up on a lot where neighborhood kids used to play baseball.

Remodeling activity nationwide is far from the blistering pace in my neck of the woods, but despite the soft real-estate market homeowners are still investing in their homes. Growth in spending for home-improvement projects is expected to increase by 3% for 2007, and spending is expected to remain constant through the first quarter of 2008, according to Harvard University's Leading Indicator for Remodeling Activity.

My husband Gerry and I have done our fair share of renovation, but our focus over the last six years has been on updating our home's dated interior look and infrastructure, and making our outdoor space more livable. We've lived with contractors overrunning the house, and all the dirt, dust and inconvenience involved in a home-renovation project. After completing a backyard renovation this spring, Gerry and I agreed it was time to take a breather.

Still, as I watch the addition next door begin to tower over our house I have to admit to having space envy. (Ok, so yes, I'm jealous.) In the summer, my father-in-law Gerald often stays in our guest bedroom on weekends when he comes up to visit and spend time on our boat. That room has done double-duty as my home office for the last seven years, and I often find myself having to interrupt my father-in-law to handle work-related tasks. At times I suffer Internet withdrawal -- not being able to check the news or poke around my favorite Web sites whenever the urge strikes can be frustrating. The remodeling boom in my neighborhood reminds me daily how an additional room or two would make my life easier.

Gerry doesn't covet our neighbors' newly added space so much as he resents how the new construction makes our home look more dated. If you've ever spent any time driving through middle-class New Jersey suburbs, you've seen our home -- a boxy Colonial bi-level, encased in aluminum siding.

When we first considered adding a room and bathroom back in 2004, Gerry suggested we make other changes. He wanted to add a portico, and make some architectural changes to make our home look less boxy, he said. Our friend Steve, who's also our contractor, warned that our "small addition" of a bedroom and bath (which he estimated he could do for about $60,000) might easily escalate into a home makeover that would cost $100,000 or more if we made the other changes Gerry wanted.

After a long talk, we decided against the addition -- we didn't think it was worth more than doubling our current $96,000 mortgage. One of our longtime financial goals has been to have our 30-year fixed-rate mortgage paid off before our 8-year-old son Gerald enters college. Doubling our mortgage now to pay for an addition would torpedo the chances of achieving that goal.

With all the construction going on in the neighborhood, it's wasn't long before Gerry once again raised the topic of adding on to our home. After talking over the pros and cons again, we agreed that it wasn't a good idea.

So we've made our peace with living within our home's boundaries. But we wondered: Would not keeping up with the Joneses hurt the home's resale value?

Most long-established New Jersey neighborhoods like ours have a mix of large and small homes. When shopping for homes, the general rule of thumb is to avoid buying the largest home in the neighborhood. A home that's much bigger than other homes in the neighborhood will typically sell for less than if that same home were in a neighborhood with equally large homes. Why?

Recent home sales help determine the fair-market value of your home. If no comparably large homes have been sold in your area, it may be difficult to convince home buyers that the larger home is worth considerably more than recent sales of smaller homes in the neighborhood.

On the other hand, having a medium-sized house in a neighborhood with much larger homes can boost its resale value. So in a situation like ours, where larger, more expensive homes are now more common than our home, my neighbors' home renovations should help to improve our home's value. Adding to its value is our lot size -- with an acre of land there's plenty of room for a homebuyer to add on to the home.

That said, people who are shopping for homes in a certain neighborhood expect certain amenities in those homes, says Kermit Baker, director of the remodeling futures program at Harvard University's Joint Center for Housing Studies. "If you're not keeping up with other homes in the neighborhood, you may have home buyers walk away from it," he says. "There's a limited number of folks who want to buy assuming they're going to have to do a significant remodeling project."

Figuring out how the super-sizing of neighborhood homes will affect our neighborhood's culture is more difficult. The larger homes will likely attract more-affluent families, and discourage older homebuyers who are looking to downsize home-maintenance costs. So our neighborhood should remain a kid-friendly haven.

Walter Molony, a spokesman for the National Association of Realtors, says the neighborhood's location is also key to how home improvements alter a neighborhood's culture. If the neighborhood is run-down and a few home buyers come in and do home improvements and tear-downs, it could attract more investment in the neighborhood. "The broad impact is that it raises property values overall and attracts more buyers because it's perceived as an up and coming area," he says.

Harvard University's Mr. Baker says it's less clear how cultures are affected when major home improvements are made in more affluent neighborhoods. "A lot of times when homeowners begin to make big home improvements other homeowners will update their homes as well," he says. So generally little actually changes in terms of the neighborhood's culture.

Gerry and I aren't planning on super-sizing our home, but we'll continue to make upgrades to make the home a more comfortable and attractive place to live.