New Homes Offer Affordability Amid Rising Costs
After a prolonged period of soaring inflation, finding consumer goods at 2021 prices has become increasingly rare. However, there is an exception in the real estate market: newly constructed homes.
In March, the median price of new construction homes dropped to $387,400, marking the lowest average in almost five years. This reflects a 6.2% decline over the last year, contrasting with the gradual appreciation of older homes in the market. The decline in new home prices aligns with builders’ strategies to tackle housing affordability issues.
Many builders are responding to high inventory levels in Southeast and Mountain West regions by significantly slashing prices and constructing smaller homes with simplified features, appealing to buyers with tighter budgets. Odeta Kushi, deputy chief economist at First American, noted that "there’s pent-up demand for home buying", suggesting that builders are well positioned to attract buyers who have been hesitant.
These efforts appear to be effective; new home sales skyrocketed to a seasonally adjusted annual rate of 682,000 in March, representing a 3.3% increase from the previous year. Homes selling in the $300,000 to $400,000 range constitute the largest market segment, while sales of homes under $300,000 have made significant gains, rising from 14% to 18% of the market.
In the Minneapolis-St. Paul suburbs, Realtor Brandon Archie has observed an aggressive push from builders to expand in the area. A scarcity of older homes has led many buyers to opt for new builds, as the competition for existing homes often involves bidding wars that inflate prices. For example, a $500,000 existing home may attract multiple offers, forcing buyers to increase their down payment or waive inspections to secure a deal. Conversely, new constructions often provide a less competitive purchasing environment, especially if buyers are open to completed homes, which can yield substantial savings without the option for customisation. One buyer saved $15,000 off the listing price, alongside $5,000 in closing cost assistance.
While new homes have traditionally commanded a premium, increasing availability has substantially reduced this price gap, and in certain areas, new constructions are now cheaper than older homes. Notably, in Austin, Texas, new homes were about 6% less expensive than existing homes in early 2023, while in Cape Coral and Sarasota, Florida, the differences were 13.5% and 7.7%, respectively.
In areas like San Antonio, where a multitude of builders are present, buyers are enjoying incentives such as price reductions, interest rate buydowns, and assistance with closing costs. Agent Brock Bremmer has witnessed considerable price cuts on new homes, alongside a trend towards building smaller designs. For instance, a standard new 1,600-square-foot home now often features four bedrooms instead of the traditional three, and some builders offer compact options as small as 800 to 900 square feet.
Despite these positive indicators, the new construction market isn’t sheltered from broader housing market challenges. Increasing mortgage rates, gasoline prices, and ongoing affordability struggles have made some potential buyers cautious. Homebuilder confidence remains low, which could pose risks moving forward.
Allan Merrill, CEO of Beazer Homes, noted, “I don’t think it’s time to organise the ticker tape parade yet,” but adds that the underlying demand for homes remains strong due to a shortage in supply. With improvements in affordability, demand might surge unexpectedly.
In conclusion, while the new construction segment is seeing beneficial changes, including price reductions and a shift towards more affordable housing options, external economic factors could have significant impacts. This landscape will be essential to monitor as the market evolves in response to both consumer need and economic pressures.
