As the spring housing market continues to face challenges such as low supply, high prices, and rising interest rates, homebuyers are turning their attention towards new construction properties. The appeal of new homes lies in the increased availability and incentives offered by builders. According to Nicole Bachaud, a senior economist at Zillow Group, there is a growing opportunity in the new construction market. In March, approximately 693,000 new single-family homes were sold, marking an 8.3% increase from the previous year. The median sales price for these new homes was reported to be $430,700, as indicated by the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. On the other hand, sales of existing homes saw a decline of 3.7% in March 2023, based on data from the National Association of Realtors.
One of the contributing factors to the shift towards new construction is the low inventory of existing homes in many areas across the U.S. This scarcity can be attributed to the mortgage rate lock-in effect, colloquially known as the “golden handcuff.” According to Bachaud, existing homeowners are deterred from selling their properties due to the fear of losing their low mortgage rates and acquiring higher ones in the current market, where 30-year fixed-rate mortgage rates are soaring above 7%. The reluctance of existing homeowners to sell has created an imbalance in the real estate market, prompting potential buyers to explore new construction options where builders tend to be more accommodating in terms of pricing.
Homebuilders are enticing buyers with a variety of incentives to stimulate sales in the new construction segment. These incentives include rate buy-downs, price cuts, and even covering closing costs for buyers. Matthew Walsh, an economist at Moody’s Analytics, states that these offers have successfully attracted prospective buyers to consider purchasing new homes. While new construction properties still command slightly higher prices than existing homes, the price gap has significantly narrowed compared to previous years. Walsh notes that the median price difference between new and existing homes is now only around 4%, representing a substantial decrease from the pre-pandemic era when new homes were priced over 40% higher than existing ones. This pricing convergence has made new construction homes more appealing to price-sensitive buyers who were previously limited to the existing homes market.
In the past, buyers with stricter budget constraints were constrained to the existing homes market due to affordability issues. However, the current landscape offers more options for buyers who are still actively searching for properties. The new home sales market provides a viable alternative for buyers who are seeking modern amenities, customization options, and better incentives. As the demand for new construction homes continues to rise, builders are adapting to meet the needs of a broader range of buyers, thereby reshaping the dynamics of the housing market.
The growing preference for new construction properties among homebuyers can be attributed to the combination of affordability, incentives, and availability. With the existing homes market facing challenges related to inventory shortages and rising mortgage rates, buyers are turning to builders who offer attractive deals to facilitate transactions. While new construction homes were traditionally perceived as premium options, the evolving market conditions have made them more accessible to a wider audience. As the housing market adapts to changing consumer preferences, the trend towards new construction is expected to persist in the foreseeable future.