Brand new homes are being sold at far cheaper prices than older houses as demand for new-builds decreases, foreshadowing a potential market crash.
For as far back as records go, new homes have almost always cost more to buy than existing properties.
This isn’t surprising – new-builds have all the latest features and appliances, and they come without the wear and tear of previously-owned properties.
What is surprising is that this trend has turned completely upside down in recent months.
In June, the median sales price of a new home was $407,200. This is around $28,000 cheaper than that of existing homes – and a 6.5 percent discount, according to Realtor.com.
Last month the gap narrowed slightly with new homes costing $19,000 less on average, but the trend remains.
July marked the fourth straight month of price inversion for new homes, the longest stretch on record.
Even economists are baffled by this turn of events. ‘New homes being less expensive than resale homes is an odd situation to be in,’ says Realtor.com senior economist Joel Berner.
Brand new homes are being sold at far cheaper prices than older houses as the demand for new-builds decreases, foreshadowing a potential market crash (picture: a new development in Atlanta, Georgia)
For as far back as records go, new homes (like the ones pictured above in Rochester, New York) have almost always cost more to buy than existing properties
Realtor.com senior economist Joel Berner (pictured) said, ‘New homes being less expensive than resale homes is an odd situation to be in’
Berner further explained that the discount is likely even more than meets the eye, ‘…many builders are offering incentives like cash at closing or reduced mortgage rates that make a major difference in upfront costs and monthly payments.’
The reason for this turnaround is up for debate, but experts have chalked it up to classic supply and demand.
In other words, builders have created too many new houses, and they have to sell them because, unlike existing houses – which have owners that can take the property off the market if it does not sell, unsold new-builds are left empty.
When homes are left empty for too long, buyers grow concerned. They wonder what is wrong with the property, or the neighborhood.
The solution is to lower the asking price of these new-builds so they are more appealing to buyers, and the outcome – as we are seeing now – is that brand new houses are being sold for less on average than existing properties.
‘Builders are currently more motivated than many existing home sellers to make a sale, and buyers stand to benefit,’ Berner told the Daily Mail, because, while most sellers of existing homes have an inventory of one, builders have hundreds or even thousands of homes to sell.
Berner told the Daily Mail, ‘This is a prime opportunity for buyers to capitalize on low new home prices and take advantage of the promotions many builders are offering such as below-market mortgage rates and cash at closing.’
The general slowdown in the market is a losing situation for everyone, Berner says.
While a housing market crash is characterized by a rapid and significant drop in home prices, as we are seeing with new-builds at the moment, the reality of the current situation is more nuanced.
De-listings have surged this summer, indicating that if homeowners cannot sell their house for the price they desire, they are willing to take the property off the market and wait for a better time to sell.
Simply put, they have a back-up plan and a safety net. Sellers of new-builds have neither.
In June, the median sales price of a new home was $407,200. This is around $28,000 cheaper than that of existing homes (pictured: a historic home in Portland, Maine)
With existing houses, owners can take the property off the market if it does not sell (pictured: a property for sale in Forest Hills, New York)
De-listings of exiting homes have surged this summer (pictured: the historic Palmer Home in Charleston, South Carolina)
This creates a standoff between buyers, who increasingly can’t afford to purchase homes right now, and sellers, who won’t settle for less than their dream price.
New-build sellers are forced to find middle ground by adjusting their prices to entice buyers.
If the aforementioned standoff between sellers and buyers is responsible for the recent inversion in new-home prices, Berner warns that it ‘brings up an existential question about the efficiency of the resale market.’
‘If it shows resale prices being much stickier than in the new-home market (not moving down when supply is high and demand is low), are those prices a true reflection of the market?’ he asks.
It’s hard to predict how this trend will progress, but the historic imbalance is certainly playing into the chaotic state of America’s real estate market.
‘I see the trend of the sale price of new homes being cheaper than existing homes continuing for a while in the short run, but eventually getting back to a long-run equilibrium where new homes are pricier,’ Berner told the Daily Mail.