In the current spring housing market, potential homebuyers are shifting their focus towards new construction properties. This trend is largely attributed to the higher availability and incentives offered by new homes as compared to previously owned ones. According to Nicole Bachaud, a senior economist at Zillow Group, there is a greater opportunity in the new construction segment. Recent data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development revealed that approximately 693,000 new single-family homes were sold in March, marking an 8.3% increase from the previous year. The median sales price for these new homes was reported at $430,700. In contrast, sales of existing homes decreased by 3.7% in March 2023, as per the National Association of Realtors.
One of the primary challenges in the existing homes market is the low inventory of available properties. This scarcity is attributed to the mortgage rate lock-in effect, which Bachaud refers to as the “golden handcuff”. Existing homeowners are reluctant to sell their properties and upgrade due to the higher interest rates prevailing in the market. With 30-year fixed-rate mortgage rates exceeding 7%, homeowners who secured loans at lower rates in recent years are hesitant to refinance at a higher rate. This situation has led to a surge in demand for new construction homes, where builders are more adaptive in terms of pricing strategies.
Homebuilders are luring buyers with a range of incentives to drive sales in the new construction segment. These incentives may include rate buy-downs, price cuts, and even covering closing costs for buyers. According to Matthew Walsh, an economist at Moody’s Analytics, these offerings have successfully motivated potential buyers to consider purchasing new homes over existing ones. Additionally, the gap in prices between new builds and existing homes has narrowed significantly in recent months. Walsh notes that the median price for a new home is now only about 4% higher than that of an existing home, a significant decrease from the pre-pandemic era when new homes commanded a price premium of more than 40%.
Historically, price-sensitive buyers with limited budgets were primarily confined to the existing homes market. However, the current scenario presents buyers with more options in the new home sales segment. Builders are prioritizing transaction volumes over profit margins, making new homes more attractive to a broader range of buyers. This shift in consumer behavior is indicative of a growing preference for new construction properties in the spring housing market.
The surge in new construction sales amidst a challenging housing market underscores the evolving dynamics of the real estate industry. As buyers seek affordability, flexibility, and incentives, new homes are emerging as a viable alternative to traditional existing properties. The trend towards new construction is expected to continue shaping the housing market landscape in the months to come.