Real estate and home buyers needed some good news somewhere, and it finally arrived. While it’s true homes “with experience” are few and far between, new construction homes are rising like a phoenix out of the pandemic/high interest rate ashes.
Realtor’s Kimberly Dawn Neumann explains, “Many homebuyers might assume a brand-new house—with its pristine, gleaming countertops and flawless wood floors—must cost more than a preexisting property. And normally it does. The latest housing statistics place the median price of a new-construction home at $449,800—a steep premium compared with $375,700 for a property that’s been lived in already.”
But things have changed and this rule is no longer true across the board. High mortgage interest rates combined with severely constrained housing inventory have turned the tables in certain areas, presenting some surprising occasions where a new house can actually end up being cheaper than an old home.
A recent study by StorageCafe found that new construction costs less than a comparable preexisting home in 18 states. In California, a state plagued by housing shortages, homebuyers can save an average of $200,000 buying new construction, while buyers in Colorado, Utah, and around Washington, DC, can pocket around half that. Want to buy in paradise? Homebuyers in Hawaii are the very best off buying new, with preexisting homes costing nearly double new construction.
Now homebuyers who’ve always dreamed of owning a new home (as well as those who are simply fed up with bidding on preexisting properties) can get in on the American Dream. And even homebuyers who’ve never even considered new construction are now taking a second look — and ending up pleasantly surprised by the relatively modest price tag and fewer hassles that a new-home purchase entails.
Show me the money…
Part of the reason for this is that many new-home builders are able to offer some distinct financial advantages over resale homes — some obvious, and others not so much. Interest rate buy-downs and hefty buyer incentives can be had, but you have to know what to ask.
Builders like control over all aspects of their business. In order to encourage the purchase of newly constructed homes, many offer financial incentives to homebuyers who agree to use their preferred lender. In this way, the builder knows that once a home is completed and move-in ready, the deal will not be delayed owing to an outside lender holding up the process.
This is often extremely beneficial for homebuyers because they can get better terms than they would have otherwise. Must the homebuyer use the in-house lender? No. But incentives like a mortgage rate buy-down or money for design center upgrades will go away. These types of incentives are not attached to resale homes and builders know it. All they truly care about is making sure they can “move through the dirt,” get their homes built, and go on to the next subdivision without defaulting on their construction loans. New home salespeople, construction superintendents, design center managers, and loan officers all sit around a conference table once a week, checking the status progress of each house, and the status of each buyer’s loan knowing precisely what is going on.
Those in the know say to look for builders that purchased mortgage rate locks when interest rates were lower than they are today, and can therefore offer loans below current market rates to their buyers. While this is not a direct discount on the purchase price of the home, lower interest rates can save tens of thousands of dollars over the life of a loan.
Timing counts…
And then there is timing, which is everything when looking to buy new construction on a budget. Why? Because the best deals can be found very early—or late—in the game. Developers love a sure thing and often offer lower prices for homes that are “pre-sold” so they get a certain number of sales to secure financing for the rest of the project. The more tiny “sold” flags they can place on their topo(graphic) board in their sales office, the better it looks. Plus, builders generally raise prices for each phase of homes, so getting in early means their lowest prices.
Buying late offers a different kind of advantage and often can offer even more substantial savings, especially once builders near the end of their build-out. Because builders want to fold up their tents and silently steal away, the last few homes that are move-in ready (interior appointments were already chosen by the builder), they are eager to close the books on that community by offering additional incentives on the few remaining homes. While these “spec” homes can limit the home selections a buyer can make, the potential savings might make a spec home well worth it, and homeowners can always renovate later to their tastes.
Location of the community as well as the house within it…
New home neighborhoods are often in outlying but growing areas, and home sites (lots) have become smaller over the years. Larger, more well-located sites will come with “lot premiums.” Smaller ones or those that back up to streets get you a better deal. To determine if it’s worth it to opt for the quieter, larger lot with the better location, have your loan officer compare the monthly payments on them. You are the one who wakes up there in the morning, so there is much to consider, whether you plan on staying there long-term or not.
One thing to note in any real estate deal is that the smallest home on the smallest lot has somewhere to go when prices rise. The largest home on the biggest lot? Unless there are comparable-sized homes that sell for more money in the surrounding area, there is less room to appreciate in price when going to sell.
”Play money” comes with decisions…
There are a number of ways you can use a builder’s “play money” (incentives): at the design center or applied to your financing. If you think you can live a bit longer without fancy stone countertops or 8-burner cooktops, don’t use their money that way. Upgrades create hefty builder profits because the builder buys the materials at cost and then can charge a hefty premium for them. It’s wise to compare how much it would cost for a contractor to install the upgrades after the home is yours and compare prices. But remember that those upgrades will not be wrapped into your mortgage until enough time has passed for a refinance of your interest rate — which makes absolutely no sense until rates go down anyway.
The latest and greatest eco-features…
Neumann says that no matter what you pay for new construction upfront, it’s worth noting that most new-construction homes are equipped with many sustainable features, including energy-efficient windows, appliances, HVAC systems, and solar panels. In many areas these are part of the building code builders must abide by, but they can provide serious long-term savings through lower utility bills. And features like these can also pay off whenever you decide to sell your home.
One thing to remember? Even after the builder hands you the keys to your new home, you’ll experience “hole-in-the-pocket” syndrome for a while. Most new homes don’t come with finished backyards.