Published March 31, 2011
Wall Street Journal
Once a common home buyer’s dream, new homes have lost some of their appeal. Instead, it’s fixer-uppers and foreclosures that have been capturing buyers’ attention, creating a window of opportunity for those still looking for new construction.
While the real estate market has struggled across the board, new homes have been hit harder than ever before. Existing home sales are down about 3% in the last year, according to the latest data from the National Association of Realtors. That’s peanuts compared to new home sales, which have fallen a whopping 28%, according to the U.S. Census. To some extent, existing homes have always recovered before new construction, but analysts say this situation is so extreme that it could delay a meaningful recovery for the new-home market by two more years. “It’s not looking promising for new housing,” says John Vogel, adjunct professor of real estate at Dartmouth’s Tuck School of Business.
The reason for the discrepancy is clear, experts say: New homes are currently 29% more expensive than existing homes, about double the typical margin, according to the NAR. At the same time, there are some radical discounts in the existing home market, foreclosures and short sales specifically, which accounted for nearly 40% of all sales in February. (In 2010, they accounted for 25% of all sales, according to RealtyTrac.com.)
But a shift in consumer psychology has also hurt new home sales. Pre-recession, buyers expected high-end appliances and fancy countertops, and builders delivered. Now consumers are more enthusiastic about a home that’s easier and cheaper to maintain, says Vogel. For many buyers, that even includes smaller rooms – a rarity in homes built during the real estate boom – that are more affordable to heat or cool. More buyers are also looking to live in or near a city – where relatively fewer new homes exist – to be closer to their job and to spend less on gasoline costs.
The trend doesn’t seem to be reversing itself any time soon. In spite of the lagging sales, new home prices are still expected to rise by nearly 1% this year, according to the NAR: Builders have all but stopped building, says David Crowe, chief economist at the National Association of Home Builders, and supply is dwindling. Nationally, there are around 186,000 new homes on the market right now, the lowest since 1967. And even builders who want to build may not be able to get financing. Just 20% of builders are shopping for loans, down from 80% pre recession, Crowe says.
But there’s are also bright spots for buyers: Eager to sell, some builders are unloading homes for less than the cost of building the house. Though limited in number, that’s mostly happening in the hardest hit states of Arizona, California, Florida and Nevada, says Crowe, and often because the builder’s loan for that property has come due. Buyers in these markets could end up with a new home for a price close to that of the fixer-upper down the street.