Is It Worth Buying "New" Instead of "Used"?
It could be a smart move to buy a new home at the moment. Traditionally, new homes cost more than existing ones. But that has now reversed, according to research published last month by Zillow. So, why not purchase a premium product at a bargain price?
How Much Cheaper Are New Homes?
Zillow reckons that, nationwide, the cost of a new home is $3.50 per square foot lower than that of an existing home. Federal Reserve Economic Data showed an average cost per square foot of $231 in July, not a big savings. But getting a new home for even slightly less than a "used" one is something to consider.
Does the New Home Discount Apply Everywhere?
No. As with pretty much all housing market data, this phenomenon isn't uniform across the United States.
There are still plenty of local markets where the average new home costs more per square foot than the average existing home. At one extreme, you'll still pay an 86-cent premium per square foot for a new home in Louisville, Ky. At the other, that premium is $216 in San Jose, Calif.
But there are as many examples of a negative premium. For example, you'll pay $57/sq ft. less for a new home in San Diego, Calif.
The point is that in most places the premium paid for a new home has shrunk, often into negative territory.
Why are New Home Prices Dropping?
Yesterday, the National Association of Home Builders said, "High mortgage rates, rising construction costs and economic uncertainty continue to deter many potential home buyers during this summer season."
Of course, the same challenges face those selling existing homes. But construction companies are typically more willing to adjust to a changing market environment by cutting prices and offering incentives to buyers. They need continuing revenues to stay in business, while individual homeowners may be able to wait out a slowdown.
Zillow reports that 26% of new homes had their prices reduced in June, while 61% of builders offered incentives that month. Those included mortgage rate buydowns and cash to cover some or all closing costs.
And companies can be agile in responding to changing demand. "The new construction homes of today, their lot sizes, and the share that are detached vs. condos have evolved over recent years, all contributing to changing the math when comparing prices against existing homes," notes Zillow. "Today’s new construction buyers are getting significantly smaller lots than those in prior years, and the lot-size advantage of buying existing homes is growing."
If a big yard is on your must-haves list, an existing home may be your only option, and worth the premium.
Why are New Homes Desirable?
Many Americans prefer a new home to one that others have lived in. And buying one can deliver some real advantages, although we've already established that bigger lot sizes aren't one of them.
Commonly cited benefits of new homes include:
- Less maintenance and fewer repairs: A builder's warranty may protect you for years. And your new appliances have manufacturers' warranties
- Increased energy efficiency: Expect lower bills for heating and cooling
- Customization options: If you buy the home before it's built, you can personalize finishes, including layout, paint colors, bathrooms, and kitchen units, countertops and appliances
- A healthier living space: A new home, built to code, should contain low-VOC (volatile organic compounds) paint and carpet. It should also be sealed to better exclude noxious fumes outside.
- Cutting-edge smart home technology: Depending on your specifications, you could buy a high-tech home
Of course, some borrowers prefer the charm of pre-owned homes, especially when those are less costly than new ones. But those five benefits are fairly compelling to many.
