About a year ago I got a phone call from someone who had been through one of our homes in downtown Davidson and loved it.  They were moving here with their family as part of a corporate location, and were looking for a walkable location in Davidson.  He asked if I was familiar with the book “The Not So Big House” and went on to say that he and his wife thought most people lived in homes far bigger than necessary and that they valued quality over quantity.

Well, long story short, I subsequently learned that this couple ended up buying a house in what I’d term a ‘big box’ production neighborhood where homes sell for $110/square foot instead of the $175/square foot of our homes.  “Lost another one to the lure of cheap square feet” I thought to myself.

As a custom home builder, we’re always competing against tract builders who offer lots of square feet for relatively little money.   Not too many years ago I’d frequently see ads for “$60/square foot” homes.  I can’t even envision building a home for that little, let alone selling it.

I’d resigned myself to having to lose out periodically to builders who offer more square feet for less money than John Marshall Custom Homes.  Not any more!  Although we won’t win every customer, I’m convinced that in the long run ‘low cost” houses actually cost more than an expensive one.  Furthermore, they can shorten your life relative to a well built home.  Here’s why:

UTILITY COSTS

This one’s pretty easy to understand.  The HERS rating is a measure of how energy efficient a home is relative to a “to-code” home.   The lower the HERS rating, the more efficient the home.  As an example, the first LEED certified home we built in Davidson had a HERS rating of 55, indicating it was 45% more efficient than a “to-code” home.

I’ve found that our LEED-certified homes cost about five cents per square foot per month to heat and cool.  For a 2,500 square foot home that works out to about $125/month.   Compare that to a cost of 10 cents a month for a “to-code” house, and the savings quickly add up (note that my experience with older homes in Davidson shows that they can cost over 15 cents/square foot per month in utility bills).

Not to get all financial on  you, but I estimate that in today’s dollars it will cost about $10,000 to heat and cool a LEED-certified home over an eight year period, compared to $20,000 for a “to-code” home.

So far, we’re $10,000 to the good.  Another factor to consider is that frequently an inexpensive home sold on the basis of cost is also poorly designed with lots of unnecessary space.  The space may not be needed, but it still costs money to heat and cool the space, so the additional utility cost of a cheap home is even greater.

TRANSPORTATION COSTS

Not all inexpensive homes are built in the suburbs, and not all expensive homes are in walkable urban locations.  But, there is a strong corollary between the location of a home and its cost, and by and large the “big-box” homes sold on the basis of low price are located in the suburbs in auto-dependent neighborhoods.

There is a cost to being dependent upon the automobile, not only in terms of gasoline and wear and tear, but also the cost of a sedentary lifestyle.  Walking is clearly cheaper and healthier.

Think about how many trips you take to community resources such as schools, restaurants, churches, banks and parks.  In the heart of downtown Davidson there are dozens of such resources within a mile of homes we are building in Davidson Springs.  In contrast, there are frequently none of these resources in the suburbs (check out walkscore.com for very graphic evidence).

Even if you choose to drive and not walk, the cost to operate a car is much lower in a walkable location.  Between gasoline costs and wear and tear on a car, I estimate that the cost to operate a car in a walkable neighborhood is about $3,000 over an 8 year period, compared to $18,000 in a suburban location.

So far we’ve closed $25,000 of the gap in cost between our homes and a “big box” production home (and threw in some health benefits of walking to boot), but the big kicker is yet to come.

THE HOME AS AN INVESTMENT

When I first moved to the area in 1996 I bought a home in a production neighborhood in Huntersville.  I was attracted by the wooded setting of the house, its proximity to my work, and yes, the low cost.  After I got married in 1998, my wife frequently suggested (this might be putting it too mildly) that we move to Davidson or South Charlotte, one of the reasons being that homes appreciated in value much more so than in Huntersville.  I resisted, frequently saying that a home is not first and foremost an investment.

For many reasons we moved to Davidson in 2005.  I have to admit that my wife was right about the appreciation thing.  Over the 9 years that we owned the house in Huntersville we sold it for only 20% more than I had paid for it, a paltry annual return of 2%.  By comparison, our home in Davidson went up in value by 40% in just five years according to Mecklenburg County.  Homes closer in to downtown Davidson went up even more, frequently more than 70% (see my blog post about ‘walking all the way to the bank.’).

You know, a home isn’t first and foremost an investment.  It’s a place to have friends, bring babies home from the hospital, and create memories.  But, I realized that it’s just as easy to have a Hallmark greeting card life in a home that appreciates in value as it is in one that doesn’t, and the end of the story can be that much more rewarding.

Much of the “low cost” of an inexpensive “big-box” home can be attributed to the underlying low cost of the land upon which it sits.  Raw land in the ‘burbs is cheap because there is relatively a lot of it.  Land in downtown Davidson is not cheap because there isn’t much left, and it can’t be created.  It is simple supply and demand.

The past of course cannot predict the future, but I think it is very safe to say that a home in a walkable urban location such as downtown Davidson will be a better investment over the long term than a home in an auto-dependent neighborhood outside of town.

I used 8 years as the timeframe of my analysis since that is the time between the property tax valuations of 2003 and 2011.  The result of those valuations is crystal clear: homes in the suburbs barely changed in value (and in many cases declined), while homes in downtown areas increased significantly in value.  If a home only increases in value 1-2% a year, and inflation is running 3-4% annually, it is actually costing you money to live in a cheap home.  Conversely, if your house is appreciating 5-6% each year, it is literally paying  you to be its owner.

And that is the true cost of low cost housing.  Over an 8 year period, homes that were both bought for around $400,000 will diverge in value by nearly $200,000.  Even accounting for inflation, that’s a big chunk of change.

These are just some of the costs of low cost housing.  Others include higher maintenance costs, and indoor air quality that is lower than what you’d find in a well-built LEED certified home (another contributor to life span).

Back to my prospect from last year.  By my estimation if they stay in their home until 2019 they’ll end up $150,000 less well off than had they bought a home in the heart of downtown Davidson.  They’ll also drive more and walk less, which has a negative effect not only on them but society at large.

Part of me wants to close with “there’s a place for low cost housing” but the truth is, no there isn’t.  Some say that by providing inexpensive housing we make it affordable for more people.  Bunk.  Low cost housing just gives more people the opportunity to spend more money than they need to.  What is needed is more education about the true costs of low cost housing.  This education needs to be provided to buyers, Realtors(r), public officials, and lenders.  Only then will everyone have the opportunity to buy a home of value.