Why New-Construction Homes Are Worth More

6/7/2020

Most homebuyers won’t be surprised to learn that brand-new homes almost always cost more than resale ones. Because after all, new homes are new and resale homes are used.

But what exactly do buyers get when they purchase a newly built home — and is it worth it?

Brian Hoffman, a third-generation owner at Red Seal Homes in Northbrook, Ill., says new-home buyers get more than just a new home. With a newly home comes:

• The ability to choose the finishes, fixtures and decor buyers want;
• A “honeymoon” period during which everything in the house is brand new;
• A builder’s warranty for the home’s finishes, systems and structure;
• Cutting-edge architecture and design;
• The latest home automation;
• Energy-efficient heating, ventilation and cooling and
• Energy-efficient home appliances.

The home automation component is especially desirable because it can be difficult and costly to add this type of system to an existing home.

“It is commonplace today (for the builder) to install some kind of hub to control data, cable, phone and security,” Hoffman says. “It’s all wired through one central hub so it’s much easier to get parts of the house to behave with one another.”

Another significant advantage is that builders “have made great strides in getting the most usable square footage” inside newly built homes, says Ian Petty, a Realtor at Relocal Home Real Estate Services in Kennesaw, Ga., near Atlanta.

“The new home is much more open and inviting,” Petty says.

Premium is More Affordable

Older homes require more updating and repairs and replacements of major components, which can be costly. — Ryan Lambesis, Related Realty and L2 Properties in Chicago The premium for newly built homes has fluctuated over time, says Rick Palacios, director of research at John Burns Real Estate Consulting, an industry consulting firm in Irvine, Calif.

Historically, newly built homes cost about 17 percent more than resale ones, based on national median price data that date back to the 1960s.

Median prices aren’t a perfect statistic because they’re affected by the mix of lower-priced and higher-priced properties as well as the direction of the market. Still, they can be useful long-term indicators.

The premium for newly built homes was significantly higher in the 2010–12 timeframe and spiked to 40 percent in 2013, Palacios says. Since then, the premium has retreated to around 30 percent. That means newly built homes today are less costly compared with resale ones.

The spike was an anomaly, caused by builders’ post-recession preference for building larger homes in prime markets with high land costs. Builders also catered to buyers who were well-positioned to purchase at a time when lenders had strict guidelines for borrowers. Intensified government regulations and rising costs for building materials and labor were also important factors, Palacios explains.

The premium has been coming down in part because builders have started to construct smaller homes in further-out locations and target buyers who may be less well-qualified to buy at a time when lenders have begun to make mortgage financing more available.

“The story now is that it’s finally compressing, which we think is a good thing for housing,” Palacios says.

Premium Varies by Location

Local housing markets don’t always reflect national real estate trends. Builders, Realtors and buyers might notice a national trend locally, but it could feel different in different markets or different areas within a market.

Hoffman points to Chicago as an example. He says his impression is that the premium has narrowed in the city and widened in suburbs. Buyers who can tolerate remodeling can find good deals for older city homes, while demand has increased for brand-new suburban homes.

“Consumers have seen the consequences of the better part of a decade without much new construction. A lot of (recently built) homes are a decade closer to obsolesce and the pickings are pretty thin in resale,” he says.

Home’s Age, Condition Matter

Petty points to Atlanta as an example. He says, that metro area “went through a big boom in the ’80s and ’90s. Those homes are becoming too old to attract buyers and the amenities in those neighborhoods could be in disrepair.”

The average resale home is 40 years old.

Older homes require more updating and repairs and replacements of major components, which can be costly, says Ryan Lambesis, broker at Related Realty and founding partner of L2 Properties, a real estate development company in Chicago.

All those factors affect the price premium for newly built homes.

With a new-construction home, repair costs are built into the price premium and buyers have the protection of the builder’s warranty and manufacturers’ warranties.

“New construction will always be more expensive,” Lambesis says. “There’s a value there that you’re paying for upfront to not (have to) pay later.”

Given the many advantages, Petty concludes: “There’s no reason not to go for new home building.”

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