When A Smaller Home is Smarter
To cut costs or reap profits, more homeowners these days are deciding that great homes come in small packages
By Jean Chatzky

(MONEY Magazine) – Is bigger really better? In recent years, we've supersized in restaurants, traded our trim sedans for SUVs too big for the garage and sharply increased the size of our houses. In 1970 the average U.S. home was 1,500 square feet with three bedrooms and 1½ baths. Today that average home is more than 50% larger, replete with an island in the kitchen, walk-in closets and more bathrooms than occupants.

But people are starting to wonder whether they really need all that space--and the mega-expenses that go with it. Increases in home size have finally stabilized, reports the National Association of Home Builders, in part because a small but growing number of homeowners would rather live in a smaller space. Other signs of the burgeoning movement to trade down: The book series The Not So Big House, by architect Sarah Susanka, has sold more than 1 million copies, while business at the Bungalow Company, an Oregon outfit that markets plans for smaller homes, is growing 20% a year.

What's driving this shift? Some people may be looking to cash in on the stunning boom in housing prices during the past five years. "People want to pocket some of the money they've made and enjoy it," says Kermit Baker, a senior research fellow at Harvard University's Joint Center for Housing Studies. Others want to save on soaring property taxes (up 50% to 100% in some areas since 2000) and energy bills (heating-oil costs spiked 32% last winter, while gas rose 10%). Expenses like these have made it tough for many homeowners to save enough for retirement and college, let alone take nice vacations and buy nice cars.

Then too, some people are simply realizing they neither need nor want so much space. Consider Barbara Olschner, 54, who recently moved from a 3,000-square-foot house in Birmingham to a 1,200-square-foot cottage in Seagrove Beach, Fla. Her new home was designed to be a guesthouse, which she planned to live in while building a larger main house on the property. But she fell in love with the smaller space--the intimacy and functionality of each room--and decided to make the place her main residence for now. "There is not a wasted corner, and it's far more manageable," says Olschner, who calculates that her housing expenses have fallen from $6,000 to $2,500 a month.

Sound appealing? The following steps can help you figure out whether trading down makes sense for you too.

• Consider recent changes in your circumstances

The decision to trade down is often sparked by a life-stage transition or a financial challenge. Have your property taxes and heating bills skyrocketed lately? Do you find it a strain to meet those costs and still save enough for retirement and other key goals? Has your family situation changed--say, your children have left the nest or you've split from your spouse? If the answer to any of these questions is yes, downsizing is worth exploring.

• Reassess form vs. function

Make a list of the rooms you have and how frequently you use them to see if you might be able to do more with less, suggests architect Susanka. For instance, when Terri and Joe Trier of Henniker, N.H., both 43, decided to build a new home recently, their first step was to evaluate how they used the space in their old one. They realized they never used their formal dining room, needed only half the space in their living room and preferred a large pantry to a spacious kitchen with plentiful cabinets. As a result, they ended up building a new home that was 400 square feet smaller than the old one but far better suited to their needs. Says Terri: "We wanted--and got--a cozy home that reflects the way we really live."

• Estimate your savings

Crunch the numbers to see how much you might really save by trading down. Say your house is worth $700,000, and you're paying around $2,160 a month on a 7% mortgage with a balance of $315,000. If you sell, you might net around $340,000 after closing costs. If you buy a new home for $525,000 and put down $200,000, you'll end up with a $325,000 mortgage, which, at recent rates of about 5.75%, will save you roughly $250 a month. Plus, you'll still have $140,000 or so left to invest. If you earn 6% annually, that money will be worth nearly $500,000 in 20 years. And that's not even taking into account your savings on property taxes and other home bills. (See the table above for the total potential savings in different locales.)

• Evaluate the trade-offs

Numbers alone can't seal the deal. You also need to think hard about what downsizing would mean to your quality of life. Will your kids fight too much if they share a room? Will you miss having a big formal living room or a guest room? Or will you discover, as Olschner did, that trading down and the savings that result bring unexpected benefits? "I realized I was working hard to support a lifestyle that wasn't really satisfying, that I had a big home just because I could afford it, not because it made me happy," she says. "It was as if my money was bossing me around. But I'm in control now."

How Much Can You Save?

Your potential savings from trading down vary greatly depending on where you live, as shown in the table below comparing how much you might save by moving from a 3,200-square-foot to a 2,400-square-foot house in three different cities.

NOTES: Mortgage costs are based on a 30-year mortgage at 5.87% with a 20% down payment. Insurance is on a homeowners policy with a $250 deductible. Utility figures are annualized to incorporate heating and cooling costs. Maintenance costs are based on keeping the home in salable condition. SOURCE: Runzheimer International.