New construction homes have historically always commanded a premium price over the existing home market. However, since the housing downturn and Great Recession; the gap between the two product types has widened. In the Twin Cities Metro Area (as of July 2014) the median listing price for a new construction home was $359,900 ($147 per square foot PSF), compared to $193,000 among existing homes ($108 PSF). New construction today is nearly twice as high as existing homes; in-part because the majority of new construction today caters to move-up or executive-level buyers while foreclosures and short sales have pushed down the overall median sales pricing. Although builders are once again pursuing some spec housing; the majority of builders will not take the risk. As the inventory of lender-mediated properties continues to wane; the gap between new construction and existing homes should narrow.
Some See Price Gap Narrowing Between New, Existing Homes
A persistent price gap between existing homes and newly built homes has given the former an advantage over the latter in recent months. But some economists say that gap will soon will start to narrow.
The latest Commerce Department data show new-home sales in July declined 2.4% from a month earlier, leaving the year-to-date total slightly less than the same period of 2013. Meanwhile, sales of existing homes rose by 2.4% in July from June for the measure’s fourth consecutive monthly gain.
Several economists and builders attribute the differing trajectories to the price gap between new and existing homes. While new homes almost always are more expensive, on average, than their older brethren, that gap widened since the recession.
Last month, the median new-home price of $269,800 exceeded the median existing price by 21%. Compare that to July 2008, when the gap was 12.8%. In July 2007, it was narrower still at 7.8%.
Many factors caused the gap to widen. In the existing-home market, resales of foreclosed homes at distressed prices pulled down median prices. In the new-home market, the sidelining of many first-time buyers since the recession led builders to focus on building larger, more expensive homes to cater to the better-heeled, move-up buyers who still are buying.
The price gap has averaged 36.5% over the past two years as prices of both types of homes have steadily increased. Yet, with new-home prices higher to begin with, new construction lately has entered territory that many buyers can’t afford. Thus, economists speculate that would-be buyers of new homes are shifting to cheaper existing homes instead.
Now, a few economists and builders point to emerging factors that stand to cause new-home prices to increase at a slower rate than existing-home prices. First, the number of foreclosed homes in the resale market continues to shrink, which will help push the existing-home market’s median price upward.
Second, builders likely will start building less expensive homes as first-time buyers inevitably return to the market in greater numbers in light of slowly loosening mortgage-qualification standards and stronger wage growth. Meanwhile, builders increasingly will feel pressured to rein in new-home prices as they face more competition from a growing supply of newly built homes and cheaper existing homes. “The growing inventory could help slow down the price increases on new homes,” said Jed Kolko, chief economist for real-estate website Trulia.
Brad Hunter, chief economist at home-building research firm Metrostudy, part of Hanley Wood LLC, also foresees a shrinking gap. “I think the rate of increase of (prices for) new homes will slow dramatically compared to last year,” he said. “Then, at the same time, I think we’ll see faster increases on the existing-home side – maybe a percentage point or two of differential.”
The supply increase has already started. The supply of newly built homes available for sale increased to 205,000 in July, a four-year high. That’s up 44% from the market’s nadir in July 2012.
Builders are “comfortable that they will be able to sell those houses, so they’re adding inventory in anticipation of the demand being there,” said David Crowe, chief economist at the National Association of Home Builders.
Mr. Crowe said he isn’t concerned about oversupply, given that the current available inventory is well less than half of its highs during the boom of more than 500,000 homes.