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New construction can offer more flexible pricing
In a housing market plagued by low supply, buyers have turned their attention to new construction because “there are more options,” Nicole Bachaud, senior economist at Zillow Group, recently told CNBC.
Unlike existing home sellers, home builders tend to be more flexible when it comes to pricing. Builders can also offer buyers incentives such as discounts and price reductions and cover closing costs, experts say.
A little less than two-thirds of builders use incentives to drive sales, Dietz said. These may include amenities improvements, mortgage rate discounts, and some limited price reductions.
Only about a quarter of builders take advantage of a price reduction, said Dietz. And these price reductions average around 5 to 6%.
The price difference between existing and new homes
The average sales price for new homes sold in the U.S. in March was $430,700, according to the latest data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
Although new buildings are still sold at a slightly higher price than existing properties, the price difference has narrowed significantly.
“Prices are much closer to parity than at any time in the last three decades,” Matthew Walsh, deputy director and economist at Moody's Analytics, previously told CNBC.
Over the past six months, the average price of a new home is only about 4% higher than the average price of an existing home. That level is significantly lower than before the pandemic, when the average price of a new home was more than 40% higher than that of an existing home, Walsh said.
The low supply of existing properties has led to an enormous increase in prices, while the prices for new buildings tend to fluctuate depending on interest rates, demand for housing, the extent of competition for existing properties and construction costs, explained Dietz.
What you should consider when buying a newly built home
If you decide to build new, keep in mind that only about 10% of new homes for sale are finished and can be considered move-in ready, Dietz said.
The majority of new homes available can vary depending on the lots and different stages of construction, he said.
Today's buyer needs to be “strategic, patient and flexible,” Dietz said, from considering different home types and locations to design decisions.
Here are four things to pay attention to:
1. Consider a Smaller House: Since 2021, homebuilders have been building a “slightly smaller product” to address the lack of affordability, Dietz said. Reducing the square footage of your home can help reduce construction costs as well as operation and maintenance costs across the board. Townhouses accounted for nearly 18% of new single-family home construction in the first quarter of the year, according to NAHB data.
The size of new single-family homes continues to shrink: In the fourth quarter of 2023, the median square footage of single-family homes was 2,156 square feet, the lowest since early 2010, the NAHB found.
2. Be open about geographical location: New construction could be cheaper in more rural areas, said Dietz.
“Whether it’s lower regulatory costs or greater land availability, this can be a smart move,” he said.
3. Keep construction costs low: Important factors such as lumber and labor costs significantly impact the cost of a new home. But as a future homeowner, you have control over the home's amenities. And depending on the type of materials you add to the home, “builders add up the bill,” Veronica Fuentes, a wealth management consultant based in Washington, D.C., previously told CNBC.
To save costs, focus on finishing the structural elements of the home and stick to basic or lower-cost features when building.
4. Think about future costs: Leave room in your budget so that costs can change significantly after the first year of owning a new building. For example, property taxes on newly built homes tend to increase dramatically after purchase because initial tax rates are often based on appraisals.
Make sure you research how often the county you're considering reassesses property taxes and what that formula is based on.
However, keep in mind that there may be other savings that offset these costs.
“When you buy a newly built home, you're typically buying a home that's more resilient and energy efficient,” which can lead to lower operating costs in the long run, Dietz said.