Why Newly Built Homes Are a Better Deal Than You Might Think

by Steve CookDecember 18, 2018

Most first-time buyers don’t bother to look at new home listings in their home searches because they expect them to outside their budget. However, the same market forces that are making existing homes more expensive today are making new homes attractive, or at least worth a look for buyers who have saved hard and waited a long time to buy.

Newly built homes have customarily cost 15 to 25 percent more than comparable existing ones, based on national median price data that date back to the 1960s. But in recent homes, that difference has been shrinking as existing homes have been appreciating at a record pace, and newly built homes haven’t.

New home under construction with wood trusses and supplies against blue sky.

The average new home in the U.S. went for $324,467 in June, 28 percent more than the $254,200 price for existing homes, according to data from John Burns Real Estate Consulting LLC, cited recently by Prashant Gopal of Bloomberg. That’s down from a 37 percent gap in 2015 and is the smallest difference since the end of 2010.

The price difference is forecast to continue to shrink as leading economists expect prices for existing homes to continue to rise in 2019 than this year, though at a slower pace. For three years, the inventory drought has driven existing home prices to record peaks, but the drought is slowly ending. Existing home price growth is up 48 percent from 2011 to 2017 and is likely to rise an additional three percent by the end of 2018.

With the housing recovery, home builders cranked up production and increasingly focus on building homes for new moderate-income buyers. The National Association of Home Builders reports that inventory of new homes for sale rose to 336,000 in October, but the median sales price fell 3.6 percent to $309,700, as the market for new construction shifts to less expensive townhouses and other lower-cost houses. Affordability is hurting home builders nearly as much as existing home sellers. Just as existing home sales fell for six months in the second and third quarters this year, new home sales are at a two and a half year low. First-time and move-up buyers, still looking for homes they can afford, rarely explore new construction in their markets.

Short inventories have been less of a problem for home builders, who sell as many of their homes as they can before they are built. In October 2018, there was a 7.4 months supply of new homes for sale in the nation compared to only a 4.3 months supply for new homes. A six months supply is considered normal.

The real payoff with a new home is what you get for the money.

Here are some of the “extras:”

  • The opportunity to personalize the house by choosing finishes, fixtures, decor, and even location.
  • A “honeymoon” period when everything is new, and repairmen aren’t needed.
  • With a new-construction home, many developers build repair costs into the price premium and include a builder’s warranty and manufacturers’ warranties.
  • Cutting-edge architecture and design, including kitchens and bathrooms.
  • The latest home automation, including energy-efficient heating, ventilation and cooling, and energy-efficient home appliances. New homes come wired for cable and internet.
  • Age and condition are important factors in appraising home values. Newer homes generally do better in this categories than older homes.

Adding these “extras” to an existing home could add 50 percent or more to its price.

Websites like Homes.com are helping buyers find new construction in their markets by including new listings among within their site for affordable homes. Or, home hunters can just search for new homes listed in a community search by price and location. Most new home listings are for homes that have yet to be built and were labeled “ready to build.” Buyers can reach out builders directly to answer questions and show the properties. Often, buyers can pick their location and provide input as the house is being built.

New home with an old country feel.

Housing economists of all stripes realize that new homes are the only way to relieve the inventory shortage. Housing markets won’t fully recover until the housing stock can handle the demand of both millennials and their younger brothers and sisters of Generation Z, who are projected to be even larger than the Millennial Generation.

“To increase home ownership, more home construction is needed, which could be boosted by delivering regulatory relief to community banks, removing the lumber tariff, re-examining stringent zoning laws and training more workers for the construction industry,” says Lawrence Yun, chief economist at the National Association of Realtors.

A newly built home will always be more expensive than a comparable existing one, but it still may not be the best buy for you. If you’re at DIY whiz and don’t mind living in someone else’s house until you have the time and money to personalize it, you’ll probably be happiest with an existing home in need of a little love. If circular saws and plaster trowels aren’t your things, you’ll easily spend more on remodeling than a new home would cost — and you’d still own an older, aging house. Today millions of prospective first-time buyers are saving for a down payment, improving their credit, and waiting until existing home prices come back down to earth. Many move-up buyers desperate for more space feel as though the kids will be in college before they have rooms of their own. Meanwhile, mortgage rates, rents, and home values continue to rise.

As the price gap between new homes and existing homes continues to shrink, next year might be a good time for you to widen your horizons and see what new homes can offer.

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About The Author
Steve Cook
Steve Cook is editor and co-publisher of Real Estate Economy Watch. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.